Divi's Laboratories Ltd. share price target

the product mix with a shift toward generics (59% v/s 57% YoY) and increased RM cost led to gross margin contraction of 390bp YoY to 59%. DIVI incurred non-recurring operational expense of INR200m related to power & fuel, consultancy and other regulatory costs. Adjusting for this, the EBITDA margin shrank 410bp YoY to 35.3% (our estimate: 34.2%). Accordingly, EBITDA declined 2% YoY to INR5.1b (our estimate: INR4.6b). DIVI had a forex gain of INR132m for the quarter. Adjusting for the same, PAT was down marginally by 1% YoY to INR3.6b (our estimate: INR3.4b). For 1HFY20, sales/...

Adverse macro situation for raw materials impacts profitability Motilal Oswal values your support in the Asiamoney Brokers Poll 2019 for...

Divis Labs Net revenues increased by 16.8 percent YoY to Rs 11.65 bn, which is in line with our estimates. The Operating margins were at 33 percent in Q1FY20 (much lower than our estimate of 36.0 percent) as against 35.4 percent in Q1FY19 on account of lower gross margin and higher expenditure.

We had downgraded Divi's after it reported one of its strongest quarters in a decade in 2QFY19, as we had realized that the performance was driven by shortages in certain molecules (like Valsartan) and currency erosion of ~10% during that quarter. For the last 2 quarters, our thesis of margin contraction is playing out and we have further cut our FY20/21E estimates by 8-9% as we are yet to see the impact of ongoing capex. We believe it would be a challenging task for Divi's to cross 36-37% margin in FY20/21E. Still, with our generous estimates of 11/10/11% revenue/EBITDA/PAT CAGR over FY20-21E, Divi's is trading at 32.3/27.7x FY20/21E EPS, a ~50% premium to peer-avg and ~40% above its historical avg, much of which corresponds to periods of 40% plus return ratios. Even so, valuations have rarely crossed 25x one-year forward P/E. With return ratios falling below 20%, current valuations look unsustainable. We maintain SELL on DIVI, following a second consecutive quarter of dismal performance. With sustained erosion in profitability, we have cut our FY20/21E EPS estimates by 8-9%. At 22x FY21E EPS, our revised TP is at Rs 1,320.

Q1FY20 operating performance was broadly in line (-4% vs. est., partly due to a forex loss of Rs61mn), and is more reflective of a business-as-normal trend. Margins recovered to 33.3%, up 60bps qoq; management expects FY20 margins to be ~36-37%. Custom synthesis business (CCS) business grew 11%yoy (vs. 8% yoy in Q4FY19) and the Generics business was up 22% yoy, while Carotenoids was up 15% yoy to Rs1.06bn. Year over year, INR/USD realizations were up 4%, implying CC growth of 11-12%. Management has guided for ~10% CC growth in FY20, while FY21/22E should benefit from increased capacities (capex of Rs17bn to be fully commissioned by FY20) and the...

While our thesis of margin contraction is playing out, we remain generous with a ~13% rev CAGR and margins largely flat at 38% in our estimates. These result in 16% earnings CAGR. ROEs are at ~20%. DIVI is trading at 31/27x FY20/21E EPS, a ~50% premium to peer-avg and ~40% above historical avg, much of which corresponds to periods of 40% plus return ratios. Even so, valuations have rarely crossed 25x one-year forward P/E. With return ratios in a significantly lower range, current valuations look unsustainable. Maintain SELL with a TP of Rs 1,445 (22x FY21E EPS). DIVI may be a good business, but the price is clearly wrong. We maintain SELL on DIVI, following a significant drop in profitability. Our thesis is playing out, even as our estimates remain unchanged. At 22x FY21E EPS, our TP stays at Rs 1,445/sh (more than 15% downside).

concerns. However, EBITDA margin at 34.9% (our estimate: 39.6%) was marginally down by 60bp YoY compared to the fall in GM. This is due to lower other expenses (excluding one-offs), down 130bp YoY, and employee cost, down 60bp YoY (as % of sales). Other expenses had one-offs due to 1) Forex loss of INR74m and 2) Considerably higher amount of INR300m towards CSR. EBITDA at INR4.3b (our est. INR5.2b) grew 13% YoY. Adj. PAT at INR3b (our est. INR4b) grew at higher rate of 25% YoY due to lower tax rate for the quarter. For FY19, Sales/EBITDA/PAT at INR49b/INR19b/INR13b grew 26%/48%/55% on YoY basis....

Margins impacted, Premium valuations: Divis Labs Net revenues increased by 15.5% YoY to Rs 12.6 bn, which is inlinewith our estimates for the quarter.

FY20 to be a slow growth year downgrade to REDUCE Q4FY19 was a big miss after a solid beat in the last two quarters. Revenue/EBITDA were 8%/23% below estimates. A large part of the miss was due to increase in RM prices, which would take 5-6 months to normalise, and a weak product mix. FY20 should be a year of slower growth (after a high base in FY19), with management guiding for 10% revenue growth and steady margins. This along with full valuations drives our rating cut to REDUCE (vs. ADD) with...

Maintain SELL with a TP of Rs 1,395 (22x Dec-20E EPS). This is Divis Labs (DIVI) second consecutive quarter with Rs 12bn plus revenues, up from a quarterly run-rate of Rs 9-10bn earlier. Although the management maintains that this is driven by normalization of orders post import alert clearance, there is an uncanny coincidence that the business has gained traction in a quarter where Valsartan API prices soared, and the Rupee fell ~10%.