Divi's Laboratories Limited - No near term triggers, keeping faith in new capacities! Retain BUY! - Antique

Divis lab reported a weak quarter with operational numbers coming below consensus and our expectation primarily on account of a top line miss. Revenues at INR 6,513m (down 9% YoY and up22% QoQ) missed our expectations by 16% driven by subdued growth in custom synthesis business. Generics business stayed flat on a yoy basis (17% below our estimates) The only positive surprise for the quarter was Cartenoids which recorded a 10% yoy growth (beat our estimates by 15%). However this quarter saw an improvement in mix as lower contribution from generics improved gross and EBITDA margins which stood at 61% and 39% respectively. Absolute EBITDA @ INR2,524m (down 12% YoY and up 38% QoQ) was below expectations by 6.7%. However, adjusting for forex loss of INR 98m, Adj. EBITDA stood at INR2,621m(down 8% YoY and up 43% QoQ). The margin improvement can be attributed to lower raw material & other expenses on account of benefits from currency depreciation. Reported PAT at INR1,818m (down 15% YoY and up 26% QoQ) & Adjusted PAT came in at INR1,916 against our expectation of INR 2,150m.

Management commentary subdued/conservative

The management suspended the practice of giving guidance for FY14 temporarily on account of uncertainty related to DNS capacity addition. The commissioning of the 3 blocks post regulatory approvals is likely to be the key catalyst driving growth (likely 2H). While the Power costs and fuel costs are expected to stay stable, in the 2H of the year, these costs should start trending down given a favorable base affect and some measures taken by the local government. While acknowledging lack of catalysts in the medium term, we believe that the eventual commissioning of capacities, high operating leverage and an improved product mix will support valuation multiples. Regulatory approval for DNS Vizag's 3 blocks remains the key trigger. Retain long term positive view.

Valuation and Outlook

We reduce our FY14e & FY15e estimates to incorporate a weak quarter and suspended guidance by 3% and 4% percent respectively. On back of uncertainty related to capacity addition also calls for a lower multiple. We roll forward our earnings estimates to FY15e at a reduced target multiple of 18XFY15e. This implies a PT of 1,155 equals 15%upside from current market price. However the returns will be blackened towards H2 and closely trail visibility on regulatory approvals and capacity addition @ DNS vizag.

Source : Equity Bulls

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