Divi's Laboratories Ltd. share price target

Outlook and Valuation: We downgrade our revenue estimates for FY21E by 5.9% to Rs. 60.3 bn dueto downgrade in Customs Synthesis and Generics business due to no revenueguidance provided by the management.

Outlook and Valuation: We downgrade our revenue estimates for FY21E by 5.9% to Rs. 60.3 bn due to downgrade in Customs Synthesis and Generics business due to no revenue guidance provided by the management.

Divis Laboratories (Divis) consolidated sales for Q4FY2020 grew by 9.7% y-o-y to Rs. 1,389 crore and were largely in line with estimates. Both the generic and custom synthesis business revenues grew in double digits. Gross margins were up 160 bps y-o-y to 62.9% aided by improved realisations, due to firmed up API prices and low raw material costs. Due to a surge in employee costs and higher other expenses, operating margins contracted 140 bps y-o-y to 32%. Operating profits at Rs 444.5 crore, grew 4.9% y-o-y and were below estimates of Rs 478 crore. The company reported a forex gain of Rs. 57 crore as against Rs. 7 crore forex loss reported in the...

However, DIVI is well placed to benefit from the CRAMS opportunity due to its strong chemistry skillset as We reduce our earnings estimate by 8%/3% for FY20/FY21E to factor in the COVID led headwinds on the business over the near term. We reduce our earnings estimate by 8%/3% for FY20/FY21 to factor in the delay We expect 25% earnings CAGR over FY20-22E, led by increased business prospects from custom synthesis as well as the generics segment. We continue to value DIVI at 26x 12-month forward earnings to arrive at price target of INR2,245. However, outlook remains intact in terms of opportunities post the We reduce our earnings estimate by 8%/3% for FY20/FY21E to factor in the COVID- 19 led headwinds on the business over the near term. We value DIVI at 26x 12- month forward earnings to arrive at a price target of INR2,245.

Divi's Labs (DIVI) saw a steep 19% EBITDA miss as high gross margins (+200bps QoQ) were negated by staff/SGA cost, leading to subpar Q4 operating margins.

On the business front, despite the nationwide lockdown, domestic growth is expected to remain more or less stable. Exports growth, barring for one or two months due to congestion in all major ports globally, is also expected to remain strong due to 1) currency benefit, 2) slowdown in competition due to delay in new approvals that will be beneficial for existing players and 3) expected demand continuum across the world despite Covid-19. Some windfall is also expected in some critical productsa case in point is Hydroxychloroquine, a malaria drug that is likely to be repurposed as a prophylaxis for Covid-19 treatment in some cases....

5 February 2020 DIVI is almost at the end of significant capacity expansion worth INR17b to cater to the increasing generics business and innovators increased outsourcing. Lower Nutraceutical sales impacted DIVIs 3QFY20 performance; however, we believe that the company is well positioned to benefit from the CRAMS opportunity over the next 4-5 years. We reduce our EPS estimate by 3%/2% for FY20/FY21E, primarily to factor in the reduction in Nutraceutical sales and the higher opex related to compliance. 3QFY20 sales grew a marginal 2.7% YoY to INR14b (v/s est. Gross margin shrank 440bp YoY to 60.8%, largely due to inferior product mix and higher raw material cost. EBITDA margin contracted at lower rate of 380bp YoY to 35.4%.

The custom synthesis (CS) business (42% of FY19 revenues) is a margin accretive business but at times lumpy as it depends on offtake from customers (global top 20 big pharma). However, this business has shown a good recovery on account of an improved business environment. Strong R&D; capabilities and India cost arbitrage along with IP adherence are some legacy strengths, which will drive incremental assignments from MNCs. We...

Divis Lab s Net revenues increased by 9.2 percent YoY to Rs 14.45 bn, which ishigher than our estimates.

Overall Revenue/EBITDA were 13% ahead of our estimates but largely in-line with consensus.