Divi’s Laboratories
Estimate change
TP change
Rating change
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7 June 2020
4QFY20 Results Update | Sector: Healthcare
CMP: INR2421
TP: INR2245 (-7%)
4Q miss estimates; outlook remains positive
Neutral
Completion of most brownfield expansions by 2HFY21
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
DIVI IN
265
642.6 / 8.4
2538 / 1467
-1/51/68
1266
Divi’s Lab (DIVI) witnessed marginal 2% YoY decline in FY20 earnings on a
high base (of FY19) and delay in its backward integration project. The
COVID-19 pandemic has impacted the completion timeline of the company’s
major capex program to some extent. However, DIVI is well placed to
benefit from the CRAMS opportunity due to its strong chemistry skillset as
well as manufacturing capability/capacity.
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 value DIVI at
26x 12-month forward earnings to arrive at a price target of INR2,245. While
growth prospects from new capex are promising, the current valuation
adequately factors in the same. Maintain
Neutral.
Sales at INR13.9b (v/s est. INR14.8b) grew 9.7% YoY for the quarter.
Financials & Valuations (INR b)
Y/E MARCH
2020 2021E 2022E
Gross margin was up 160bp YoY to 62.9%, led by superior product mix.
53.9 62.8 71.9
However, EBITDA margin contracted 470bp YoY to 32% due to higher other
Sales
18.4 21.7 27.6
EBITDA
expenses/employee cost (+500bp/+130bp YoY as % of sales), which has
13.0 16.0 20.2
Adj. PAT
more than offset the Gross Margin expansion.
EBIT Margin (%)
30.7 31.2 34.8
48.9 60.2 76.3
EBITDA at INR4.4b (v/s est. INR5.3b) declined 4.4% YoY for the quarter.
Cons. Adj. EPS (INR)
-2.3 23.0 26.8
Adjusting for forex gain in other income (INR571m) and tax reversal
EPS Gr. (%)
275.4 343.1 403.7
BV/Sh. (INR)
(INR337m), PAT declined 3.6% YoY to INR3.1b (v/s est. INR3.9b).
Ratios
Net D:E
0.0 -0.1 -0.2
For FY20, revenue has increased 9% YoY to INR54b, while EBITDA/adj. PAT
has dipped 2% each YoY to INR18.4b/INR13b.
18.2 19.5 20.4
RoE (%)
18.5 19.4 20.4
RoCE (%)
Payout (%)
36.1 20.5 20.5
Highlights from management commentary
Valuations
50.6 41.1 32.5
The CRAMS/custom synthesis mix for the quarter was 59:41.
P/E (x)
35.6 29.9 23.1
DIVI garnered carotenoid sales of INR850m/INR4.4b for 4QF20/FY20.
EV/EBITDA (x)
Div. Yield (%)
0.6
0.4
0.3
Increased employee cost and other operational expenses were on the back
FCF Yield (%)
0.1
1.2
2.1
of commercialization of the DCV SEZ facility.
35.6 29.9 23.1
EV/Sales (x)
DIVI incurred capex of INR13b for FY20 and has guided for INR5b for FY21.
Lower operating margins lead marginal decline in earnings YoY
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Mar-20 Dec-19 Mar-19
52.0
52.0
52.0
15.6
15.5
14.2
19.1
19.7
21.2
13.4
12.8
12.6
FII Includes depository receipts
DIVI has commenced partial commercial production at two sites – the DC-
SEZ unit (in Feb’20) and the DCV-SEZ unit (in Mar’20).
The balance works at the brownfield projects of DC-SEZ/DCV-SEZ, ongoing
projects for backward integration and de-bottlenecking are expected to be
completed in 2HFY21.
During the quarter, the USFDA conducted an inspection at DIVI’s Unit-II
facility at village Chippada, Bheemunipatnam District, Andhra Pradesh, from
27
th
-31
st
Jan’20, which ended with zero observations.
Research Analyst: Tushar Manudhane
(Tushar.Manudhane@motilaloswal.com); +91 22 5036 2498
Hitakshi Chandrani
(Hitakshi.Chandrani@MotilalOswal.com); +91 22 6129 1557 /
Bharat Hegde
(Bharat.Hegde@motilaloswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.