August 6, 2018 ICICI Securities Ltd | Retail Equity Research Result Update Q1 numbers indicate normalising trend… Revenues grew 21.2% YoY to | 995.3 crore (I-direct estimate: | 1151.2 crore) mainly due to lower base of import alert in Q1FY18, currency tailwinds and strong growth in the carotenoid segment EBITDA margins improved 554 bps to 35.4% (I-direct estimate: 36%) mainly due to strong gross margins, lower other expenditure. EBITDA grew 43.7% YoY to | 351.9 crore (I-direct estimate: | 414.4 crore) Net profit grew 50.8% to | 266.2 crore (I-direct estimate: | 308.1 crore) mainly due to a strong operational performance Established CRAMS player The company has two main segments - generics (~56% of FY18 revenues) and custom synthesis (CRAMS; 44% of FY18 revenues). The custom synthesis (CS) business is a margin accretive one but at times lumpy as it depends on offtake from customers (global top 20 big pharma). This business had a difficult time in FY10 and FY11 as most customers resorted to de-stocking due to the global slowdown. 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. The recent lifting of import alert has led to improved sentiments in the near future. We expect CS to grow at a CAGR of ~14% to | 2181 crore in FY18-20E. Focus on few niche generics The company remains committed to only a few research driven niche opportunities as was the case when it started commercial operations in early nineties. Thus, it has filed just ~42 DMFs with USFDA and does not want to increase its count drastically. Two generics, Naproxen (pain management) and Dextromethorphan (cough suppressant) account for ~26% of overall revenues. Divi’s enjoys ~70% global market share in these two products. These products are already mature with limited competitors having other priorities. DLL is also increasing its presence in another niche area of carotenoids after acquiring requisite capabilities. It has developed various types of carotenoids including beta-carotene, the largest in the group. With focus on brownfield expansion the management is committed to address the capacity constraints. We expect sales from generics (includes Carotenoids) segment to grow at a CAGR of ~15% to | 2815 crore in FY18-20E. Regulatory issues addressed; capacity constraints waning slowly After a turbulent FY18 due to import alert, the company’s financials seem to be back on track. Another aspect was capacity utilisation, which reached an optimum level by FY17. However, thanks to persistent brownfield expansion to the tune of nearly ~| 1000 crore in the past three years, the current utilisation is now at ~85%, which can still provide room for decent growth in the next two to three years. The greenfield expansion at Kakinada is still some time away but this delay is unlikely to have a material impact on growth due de-bottlenecking at existing plants expansion. On the margins front, the management expects normalisation of margins trajectory as besides operating leverage there will be savings on the regulatory expenses front. We ascribe a target price of | 1380 based on 26x FY20E EPS of | 53.1. We upgrade the stock to BUY on the back of likely normalisation of margins and growth trajectory on the back of brownfield expansion besides fastest resolution of USFDA regulatory issues. Rating matrix Rating : Buy Target : | 1380 Target Period : 12-15 months Potential Upside : 15% What’s Changed? Target Unchanged EPS FY19E Changed from | 40.7 to | 44.9 EPS FY20E Changed from | 48.7 to | 53.1 Rating Changed from Hold to Buy Quarterly Performance Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Revenue 995.3 821.2 21.2 1,088.0 -8.5 EBITDA 351.9 244.8 43.7 386.5 -9.0 EBITDA (%) 35.4 29.8 554 bps 35.5 -17 bps Net Profit 266.2 176.5 50.8 261.6 1.7 Key Financials (|crore) FY17 FY18 FY19E FY20E Revenues 4064.3 3912.8 4386.3 5000.4 EBITDA 1446.0 1268.4 1578.1 1825.1 Adj. Net Profit 1060.4 883.7 1193.3 1409.6 Adjusted EPS (|) 39.9 33.3 44.9 53.1 Valuation summary FY17 FY18 FY19E FY20E PE (x) 30.0 36.0 26.6 22.6 Target PE (x) 34.5 41.5 30.7 26.0 EV to EBITDA (x) 20.8 23.4 18.6 15.8 Price to book (x) 5.9 5.4 4.7 4.0 RoNW (%) 19.8 14.9 17.6 17.9 RoCE (%) 25.3 20.0 22.7 23.2 Stock data Particular Market Capitalisation Debt (FY18) Cash & cash equivalents (FY18) EV 52 week H/L 1223/606 Equity capital Face value | 2 Amount | 29851 crore | 31790 crore | 63 crore | 2002 crore | 53.1 crore Price performance (%) 1M 3M 6M 1Y Divi's Labs 11.6 0.5 19.4 77.7 Aurobindo 1.4 2.2 5.1 -13.4 Dr Reddy's Labs 0.2 8.0 8.5 1.6 Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Divi’s Laboratories (DIVLAB) | 1198
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August 6, 2018
ICICI Securities Ltd | Retail Equity Research
Result Update
Q1 numbers indicate normalising trend…
Revenues grew 21.2% YoY to | 995.3 crore (I-direct estimate:
| 1151.2 crore) mainly due to lower base of import alert in Q1FY18,
currency tailwinds and strong growth in the carotenoid segment
EBITDA margins improved 554 bps to 35.4% (I-direct estimate: 36%)
mainly due to strong gross margins, lower other expenditure. EBITDA
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Reuters, Company, ICICI Direct Research
Key events
Date Event
Feb-08 USFDA inspects Unit 1 manufacturing facility without any observations
Jul-08 Gives sales warning on possible slowdown at the client’s end after it posts strong growth of 45% in net profit and 17% growth in sales for the quarter ending
June 2008
Jun-09 Issues bonus shares in the ratio of 1:1
Apr-10 Receives approval from the development commissioner of Visakhapatnam SEZ for setting up and development a new manufacturing facility
Mar-12 USFDA inspects neutracetical and API units at the Vizag’s DSN SEZ unit and gives approval for the same
Jun-14 Receives USFDA clearance for all four facilities
Aug-15 Issues bonus shares in the ratio of 1:1
Dec-16 Receives five Form 483 observations from USFDA for its active pharmaceutical ingredient plant in Visakhapatnam
Mar-17 Divi’s Lab’s unit-II of Vizag API plant in Andhra Pradesh received an import alert from the USFDA
Jul-17 USFDA lifts Import Alert 99-32 Vizag unit 2
Sep-17 USFDA revisits unit 2 (Visakhapatnam) and issues new 5 observations. Earlier issued 6 observations are cleared by the USFDA
Nov-17 USFDA informs Divis its intention to lift Import Alert 66-40 and close out the warning letter
May-18 USFDA clears unit I at Hydrabad without any observations
Source: Company, ICICI Direct Research
Top 10 Shareholders Shareholding Pattern
Rank Investor Name Latest Filing Date % O/S Position Position Change
1 Motaparti (Nilima) 30-Jun-18 20.3 54.0m 0.0m
2 Divi (Satchandra Kiran) 30-Jun-18 17.3 46.0m 0.0m
3 Divi (Murali Krishna Prasad) 30-Jun-18 5.9 15.6m 0.0m
ICICI Securities Ltd | Retail Equity Research Page 12
ANALYST CERTIFICATION
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