Pharmaceuticals November 03, 2014 Divi's Lab India Research Bloomberg: DIVI IN Reuters: DIVI.BO RESULT REVIEW HOLD Robust Revenue Growth Recommendation CMP: Rs1,876 Divis Labs Total revenues are up by 47% YoY to Rs 8.3bn against our expectation of Rs 6.9bn during the quarter. Operating margins were at 36.8% lower than our estimate of 38.9% due to lower gross margins. Net Profit was up by 12.1% to Rs 2,296mn higher than our estimates of Rs 1,911mn. Target Price: Rs2,090 Previous Target Price Rs1,927 Margins Impacted: Company's EBITDA Margins were at 36.8% (our estimates 38.9%) lower than 43.9% reported in Q2FY14 due to lower gross margins. Raw material cost was at 42.2% of revenues as against 31.8 % in Q2 FY14. Generics and Nutraceuticals constituted 54% of revenues. The Company's net profit was at Rs 2,296mn in Q2FY15 compared to Rs 2,049mn in Q2FY14. Divis Labs had a forex gain of Rs 43.2mn as against a gain of Rs 310mn in Q2FY14. Outlook and Valuation: We upgrade our FY15E revenues by 0.7%/2.1%/2.1% for FY15E/FY16E/FY17E respectively due to better traction and guidance given by company. We lower our EBDITAM by 60–230 bps for FY15-17E due to lower gross margins. We downgrade our EPS by 3.3% to Rs 64 for FY15E due to lower EBDITAM and upgrade EPS by 1.4% to Rs 82.3 for FY16E and by 1.1% to Rs 103.5 for FY17E. We upgrade our price target by 8.5% to Rs 2090 based 22.5x on average of FY16E-17E EPS of Rs 92.9. We reiterate our ‘HOLD’ rating on the stock. 11% Stock Information Market Cap. (Rs bn / US$ mn) 249/4,058 52-week High/Low (Rs) 1,888/965 3m ADV (Rs mn /US$ mn) 298/4.9 Beta 0.5 Sensex/ Nifty 27,866/8,322 Share outstanding (mn) 133 Stock Performance (%) Absolute Rel. to Sensex 1M 4.2 3M 27.1 12M 92.9 YTD 53.6 (0.4) 18.1 46.5 16.7 Performance 29,500 27,500 25,500 23,500 21,500 19,500 17,500 15,500 2,050 1,850 1,650 1,450 1,250 1,050 850 Nov-13 Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Aug-14 Sep-14 Oct-14 Revenue Details: Divi’s standalone revenues increased by 47% YoY to Rs 8.33bn compared to Rs 5.67bn in Q2FY14. Customs Synthesis grew by 40.5% to Rs 3.82bn as against our estimates of Rs 3.26bn while Generics were up by 54.7% to Rs 4.04bn as against our estimates of Rs 3.14bn. Neutraceuticals revenues were up 33.3% at Rs 440mn against Rs 330mn in Q2FY14. Upside (%) Sensex (LHS) Divis Labs. (RHS) Source: Bloomberg Earnings Revision (%) Key Financials Y/E Mar (Rs mn) FY13 FY14 FY15E FY16E FY17E Net Sales 21,448 25,321 30,699 37,469 44,977 EBITDA 8,152 10,145 11,574 14,541 17,717 Net Profit 6,020 7,733 8,490 10,918 13,734 EPS (Rs) 45.4 58.3 64.0 82.3 103.5 EPS Growth (%) 12.9 28.5 9.8 28.6 25.8 EBITDA margin (%) 38.0 40.1 37.7 38.8 39.4 PER (x) 41.4 32.2 29.3 22.8 18.1 P/BV (x) 10.0 8.4 7.1 5.9 4.8 Price/sales (x) 11.6 9.8 8.1 6.6 5.5 EV/EBITDA (x) 30.5 24.5 21.1 16.5 13.2 ROCE (%) 33.5 35.5 34.3 36.3 36.7 ROE (%) 26.0 28.3 26.2 28.2 29.3 Source: Company, Karvy Stock Broking FY15E FY16E FY17E Revenue 0.7 2.1 2.1 EBITDA 5.1 0.7 0.7 EPS 3.3 1.4 1.1 Source: Karvy Stock Broking Analysts Contact Rahul Sharma 022 - 6184 4310 [email protected] November 03, 2014 Divi's Lab Key Takeaways Revenues from DSN have been Rs 2.33bn for the quarter and Rs 3.7bn for the six month period. DSN SEZ had contributed Rs 4.5bn revenues last year. Generics revenue traction has been on account of Valsartan scale up in various markets including supplies to key player in US markets. The company believes revenue growth could be in excess of 21% in current year and 20-25% in FY16E. Divis Labs maintains its revenue guidance of Rs 2bn for the nutraceuticals business. Margins for the company would be in the range of 37-38%. Power cost is expected to be higher in the second half. Our estimates were higher, hence we have cut our power cost for FY15E. The company’s working capital cycle should even out in H2 FY15E. It has capitalized assets to the tune of Rs 500mn for the quarter. The Hudhud cyclone has impacted the company and it has suffered a loss of Rs 100mn which would be recovered from insurance. Q3FY15E would see production loss for 15 days on account of the Hudhud cyclone. Company’s depreciation was higher at Rs 293mn in Q2FY15 as against Rs 225mn in Q2FY14 due to change in depreciation norms on useful life of assets. Exhibit 1: Quarterly Performance Year end March (Rs Mn) Q2FY15 Q1FY15 Q2FY14 Q-o-Q% Y-o-Y % Net Revenues 8,331 6,427 5,670 29.6 47.0 Cost 5,263 4,075 3,182 29.2 65.4 EBITDA 3,068 2,352 2,487 30.5 23.4 EBITDA Margin (%) 36.8 36.6 43.9 Other Income 155 127 55 22.5 180.5 4 4 4 19.4 10.3 293 333 225 (12.0) 29.9 2,927 2,142 2,624 36.6 11.5 36.1 9.7 36.7 12.1 Interest Expense Depreciation Profit before Tax Tax 630 463 574 Tax rate (%) 21.5 21.6 21.9 0.0 0.0 0.0 2,296 1,679 2,049 EOI Net Profit Source: Company, Karvy Stock Broking 2 November 03, 2014 Divi's Lab Exhibit 2: Changes in Estimates Y/E Mar (Rs mn) FY15E FY16E FY17E New Old % change New Old Custom Synthesis 14,062 14,015 0.3 17,015 16,608 2.5 Generics 14,519 14,396 0.9 17,568 17,203 Neutraceuticals 2,000 2,000 - 2,800 Revenues 30,699 30,485 0.7 Raw materials 12,095 11,127 8.7 Raw materials/ sales 39.4 36.5 Other expenses 4,286 4,419 Other expenses / sales 14.0 14.5 Power Cost 1,810 1,951 Power Cost / sales Old % change 20,163 19,681 2.5 2.1 21,081 20,644 2.1 2,800 - 3,640 3,640 - 37,469 36,691 2.1 44,977 44,051 2.1 Marginal upgrade in revenues 14,425 13,759 4.8 17,316 16,519 4.8 lower gross margins due to greater contribution from Generics 38.5 37.5 38.5 38 5,265 5,256 6,124 6,114 14.1 14.3 13.6 14 (7.2) 2,548 2,568 (0.8) 3,058 3,084 6.8 7.0 6.8 7.0 (5.1) 14,541 14,439 0.7 17,717 17,598 38.8 39.4 39.4 40 (3.0) % change New Comments 0.2 0.2 (0.8) lower power cost in lieu of H1 nos 5.9 6.4 11,574 12,196 EBITDA margin (%) 37.7 40.0 Other income 577 545 6.0 929 958 (3.0) 1,453 1,509 (3.7) lower excess cash Depreciation 1,250 1,394 (10.4) 1,366 1,485 (8.0) 1,431 1,553 (7.9) lower depreciation in lieu of H1 nos Tax 2,395 2,549 (6.1) 3,170 3,126 1.4 3,987 3,945 1.1 Net Profit 8,490 8,780 (3.3) 10,918 10,768 1.4 13,734 13,590 1.1 EPS (in Rs.) 64.0 66.1 (3.3) 82.3 81.1 1.4 103.5 102.4 1.1 EBITDA 0.7 Source: Company, Karvy Stock Broking 3 November 03, 2014 Divi's Lab Financials Exhibit 3: Profit & Loss Statement Y/E Mar (Rs mn) Net Revenues Total Material Cost Staff Manufacturing Expenses Administrative and other expenses Selling & Dist Others Selling, General & Admin Exp Total Expenditure EBITDA EBITDA margin (%) Other Income Interest Depreciation Profit Before Tax Tax Effective tax rate (%) Net Profit FY13 21,448 7,986 1,977 2,122 1,085 115 12 1,211 13,297 8,152 38.0 448 18 769 7,812 1,792 22.9 6,020 FY14 25,321 9,142 2,325 2,385 1,143 126 57 1,326 15,177 10,145 40.1 706 21 921 9,909 2,176 22.0 7,733 FY15E 30,699 12,095 2,743 2,915 1,212 141 19 1,371 19,125 11,574 37.7 577 16 1,250 10,884 2,395 22.0 8,490 FY16E 37,469 14,425 3,237 3,822 1,284 159 0 1,443 22,928 14,541 38.8 929 17 1,366 14,087 3,170 22.5 10,918 FY17E 44,977 17,316 3,819 4,588 1,361 175 0 1,537 27,260 17,717 39.4 1,453 18 1,431 17,722 3,987 22.5 13,734 FY16E 265 42,072 42,338 188 16 203 1,150 43,691 20,885 7,801 13,084 613 3,647 13,590 10,272 9,208 81 1,935 35,086 2,371 6,367 8,738 26,348 43,691 FY17E 265 51,161 51,426 226 16 241 1,150 52,818 21,928 9,232 12,696 1,070 3,647 16,437 12,423 14,837 81 2,295 46,073 2,847 7,822 10,668 35,405 52,818 Source: Company, Karvy Stock Broking Exhibit 4: Balance sheet Y/E Mar (Rs mn) Equity Reserves Net worth Short-term Loans Long-term Loans Total Loans Deferred Tax Liabilities Liabilities Gross Block Depreciation Net Block Capital work-in-progress Long-term Investments Inventories Debtors Cash Other Current assets Loans and Advances Total Current assets Creditors Other current liabilities Total current liabilities Net current assets Total Assets FY13 266 24,741 25,006 305 21 326 792 26,124 13,383 4,296 9,087 3,034 4,078 8,357 5,120 409 67 1,236 15,188 1,822 3,441 5,263 9,925 26,124 FY14 265 29,368 29,633 163 16 179 1,150 30,962 17,403 5,185 12,218 1,445 5,019 9,324 7,237 405 61 1,396 18,423 1,675 4,468 6,143 12,280 30,962 FY15E 265 34,871 35,137 154 16 169 1,150 36,456 19,998 6,435 13,563 750 3,647 11,168 8,441 4,357 81 1,628 25,676 1,988 5,192 7,180 18,496 36,456 Source: Company, Karvy Stock Broking 4 November 03, 2014 Divi's Lab Exhibit 5: Cash Flow Statement Y/E Mar (Rs mn) FY13 FY14 FY15E FY16E FY17E EBIT 7,382 9,224 10,324 13,175 16,286 (1,285) (2,359) (2,264) (3,001) (3,428) 448 706 577 929 1,453 (Inc.)/Dec in working capital Other Income Depreciation Dividends paid (-) Interest paid (-) Tax paid (-) Deferred tax liability Cash Flow from Operations Capital Expenditure (-) Cash from operations 769 921 1,250 1,366 1,431 (1,991) (2,655) (2,987) (3,717) (4,646) (18) (21) (16) (17) (18) (1,792) (2,176) (2,395) (3,170) (3,987) 183 358 0 0 0 3,696 3,998 4,489 5,566 7,091 (3,687) (2,463) (1,900) (750) (1,500) 10 1,535 2,589 4,816 5,591 Inc./(Dec.) in short-term borrowing (197) (142) (10) 34 38 Inc./(dec.) in long-term borrowing (67) (5) 0 0 0 Inc./(dec.) in borrowings (264) (147) (10) 34 38 (Inc.)/Dec. in Investments 692 (941) 1,372 0 0 Cash from Financing activities 428 (1,088) 1,363 34 38 (338) (451) 0 0 0 Opening cash 309 409 405 4,357 9,208 Closing cash 409 405 4,357 9,208 14,837 Others Source: Company, Karvy Stock Broking Exhibit 6: Ratios Y/E Mar FY13 FY14 FY15E FY16E FY17E EV/EBITDA 30.5 24.5 21.1 16.5 13.2 ROE % 26.0 28.3 26.2 28.2 29.3 ROCE % 33.5 35.5 34.3 36.3 36.7 PE(x) 41.4 32.2 29.3 22.8 18.1 P/S(x) 11.6 9.8 8.1 6.6 5.5 P/BV(x) 10.0 8.4 7.1 5.9 4.8 Source: Company, Karvy Stock Broking 5 November 03, 2014 Divi's Lab Stock Ratings Buy Hold Sell : : : Absolute Returns > 15% 5-15% < 5% For further enquiries please contact: [email protected] Tel: +91-22-6184 4300 Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. 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