Divi's Laboratories: Healthy show despite cost hurdles

Last Updated: Wed, Nov 07, 2012 04:13 hrs

Divi’s Laboratories fell nearly eight per cent intraday on Monday post September quarter results that were marginally below expectations and lower sales growth guidance by the management. The bulk drugs and intermediates contract manufacturer posted revenues of Rs 470 crore (up 33 per cent) slightly below analysts’ expectations. The management also projected a FY13 sales growth of 20-25 per cent as compared to 25 per cent plus earlier. SBICAP Securities’ analysts say the September quarter results failed to impress the Street due to high power costs, which were at 18 per cent of sales as compared to 15 per cent in the previous quarter, and low utilisation levels of the company’s new special export zone (SEZ) unit at Visakhapatnam.

However, most analysts have a ‘buy’ on the stock (it has gained 50 per cent over the last year) as they believe sales momentum is likely to be maintained, going ahead, on the back of higher capacities, and the stock is likely to maintain its premium valuations.

Says Deepak Malik of Emkay Global Financial Services, “Divi’s continues to maintain strong performance in the CRAMS space vis-à-vis its peers. Best in class margins and return profile (return on invested capital of over 30 per cent), strong balance sheet (near zero debt), India-centric assets coupled with positive cash flow provides incremental comfort to investors.” Analysts have pegged a target price in the range of Rs 1,250-1,400. After the initial fall, the stock recovered some ground. Though it is still down four per cent (to Rs 1,138 levels) in two sessions, it is trading at 18 times its estimated FY14 earnings, which is at a discount (12 per cent) to its historic valuations.

In Rs crore FY12 FY13E
Net sales 1,864 2,366
% chg yoy 41.6 26.9
Operating profit 628 827
% chg yoy 40.8 31.7
Net profit 533 697
% chg yoy 24.2 30.8
P/E (x) 29.3 22.1
E: Estimates
Source: Analyst reports

Eyeing healthy growth
The company’s forecast of 20-25 per cent revenue growth for FY13 is backed by growth across the customer synthesis and generics active pharmaceutical ingredient (API) segments, which analysts believe looks sustainable in the medium-term. DSP Merrill Lynch analysts Arvind Bothra and S Arun say the company is likely to attain a 20-25 per cent revenue growth over the next six-eight quarters on the back of strong visibility from key clients supported by contribution from the new Vizag SEZ facility. The unit’s contribution, which was at five per cent in FY12, is likely to go up to 20 per cent in FY14 as will its utilisation, which stands at 30 per cent currently.

Steady margins
The company recorded margins of 39 per cent (up 335 basis points year-on-year) aided by better product mix, despite high fuel costs. Power costs increased by Rs 15 crore as Divi’s had to buy from the grid at a higher price due to power crisis in Andhra Pradesh.

However, going ahead, while power costs are likely to increase, BofA-ML analysts say their margin assumption at 38 per cent (FY12 margins 37 per cent) is not at risk as higher utilisation at the Vizag SEZ would drive operating leverage.

At the net level, profit growth at 11 per cent to Rs 120 crore was lower than estimates due to a Rs 21 crore forex loss. Adjusted for this, net profit was up 26 per cent. Analysts believe earnings are likely to grow annually by 20 per cent over FY12-14.

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