Divi's Laboratories Ltd. share price target

With the recent run-up in the stock price and the inspection at Unit-I looming, we maintain a NEUTRAL rating on the stock, with a revised TP of Rs 680 (16x Jun-19E). We foresee ~2% revenue CAGR over FY17-20E, and ~5% earnings CAGR. With the import alert (IA) on its crucial Unit-II facility coming into force at the end of Mar-17, 1QFY18 was expected to finally reveal the true picture of Divis Labs (DIVI) business as it stands. Significantly, the top-line declined ~19% YoY, EBITDA margin came in at ~30% (vs ~40% in 1QFY17) and PAT was Rs ~1.8bn (down ~42% YoY). Absence of non-exempted products in revenues, coupled with the time taken to establish protocols and procedures required to export the exempted products under the IA, led to this steep decline in the business. Remediation costs at Unit-II and preparations at Unit-I also contributed to the margin decline.

The USFDA has communicated to Divi's Laboratories its intention to lift the import alert '99-32'' imposed on unit-II (that includes EOU, SEZ and DSN SEZ) of the Vizag API plant. USFDA had inspected this plant between November 29 and December 6, 2016 and issued a Form 483 to the unit with five observations. Subsequently, an import alert was issued to the products manufactured at unit-II under clauses 66-40 and 99-32, with an exemption for 12 products (10 products initially exempted and then two added later on), followed by a warning letter to the plant in May 2017....

Q4 revenue declined 3% YoY in line with our estimate, while EBITDA adjusted for Rs 290 mn of forex loss at Rs 3.9 bn was 9% below our estimate. Adj. PAT declined 10% YoY at Rs 2.88 bn, 12% below our estimate.

Revenue increased by 9.21% to Rs. 1063.14 Cr in Q4FY17 when compared to the previous quarter.

Post the import alert (IA) on its crucial Unit II plant, Divis Labs (DIVI) reported mixed 4QFY17 numbers. The top-line declined 3% YoY, and the EBITDA margin came in at ~34% (vs ~36% in 4QFY16).

ICICI Securities Ltd | Retail Equity Research Revenues fell 3% YoY to | 1067 crore against I-direct estimate of | 1041 crore. Both generic CS segments registered de-growth of 1%, 3%, respectively, due to impact of capacity constraints & import alert EBITDA margins declined 224 bps to 33.9% (I-direct estimate: 36.8%) mainly due to increase in other expenditure, which included forex...

Divi's management, in its conference call post import alert on Unit 2, highlighted the alert will impact only ~5% of its total sales, as remaining 17% of sales in US is under exemption list. Company did not share any timelines for remediation (as awaiting detailed comments by USFDA)

The US FDA has finally put an end to speculation about the outcome of its Dec-16 inspection of Divis Labs (DIVI) Unit 2 facility in Vizag by issuing an import alert (IA). However, the US FDA has also exempted 10 key products in which DIVI has a significant market share in the US.

Immediate impact nominal but suspense over future revenues The management has indicated just 3-4% impact due to exemption of key products from the import alert. The impact also includes effect of CRAMS business, which has a direct link with DMFs from Vizag. However, we are more concerned about the spill over effect of import alert on the custom synthesis business, which is driven by customer stickiness. This may also trigger other regulatory inspections especially by European authority EMA. EU, US together contributed ~73% of total sales in FY16. Note that...

While Q3 EBITDA was inline with estimate, PAT of Rs 2.68bn was 10% below our estimate due to higher taxes. Revenue growth was muted at 13% YoY (9M was 14% YoY, 10% in cc terms). Divi'sguided for 10- 15% cc revenue growth for FY17/18 vs.15% earlier, given delay in adding capacities (Vizagand Kakina..