Re-iterate Buy on Divis Laboratories - Emkay

Divi's Q4FY11 performance was above expectations with a) Revenue at Rs4.8bn (up 53% YoY); b) EBIDTA at Rs1.9bn (up 28% YoY) & c) APAT at Rs1.75bn (up 35% YoY)

Revenues were driven by robust performance of the existing products in CSS (Custom Synthesis) and its Generics portfolio.

The company is doing capex of Rs1.75bn in FY12 in order to address shortfall in capacities in FY13. Out of this, Rs1.3bn will be spent on new units in SEZ.

With increased visibility on growth, we revise our EPS estimates upwards by 12%/ 11% for FY12/13E. Raise the target price to Rs927 (earlier Rs833). Re-iterate Buy.

Result Highlights

Revenues were driven by good off-take in the existing products in the company's Generic and the CSS portfolio. The company launched 21 new products during the full year with 14 in the API segment and 7 in the CSS segment. New products contributed 6% to FY11 sales.

Operating margins during the quarter expanded by 183bps QoQ to 40.3% mainly on the back of higher contribution of high margin products in the generic segment and good off-take in the custom synthesis business.

Future growth drivers

Company has set up a new multi-purpose plant at Vizag, part of which is commissioned and trial runs have commenced. The company is further investing Rs1.75bn as capex in FY12E in order to address shortfall in capacities in FY13.

Management has given a guidance of 25% growth in top-line for FY12E, with EBITDA margins to be maintained at similar levels as FY11.

Improvement in operating margins will be on account of a) improved product mix, b) higher contribution of high margin Carotenoids business, and c) normalization of demand from US and Europe.

Valuation

Divi's continues to maintain strong performance in the CRAMS space vis-à-vis its peers in terms of best-in-class operating metrics. We expect Divi's to report 22% growth in revenues in FY12E and 20% growth in FY13E. EBIDTA margins are expected to increase from 38.1% in FY11 to 38.5% in FY12E and 39.5% in FY13E. Earnings will grow by 20% CAGR over FY11-13E. We value the stock at 20x FY13E earnings (in-line with its 3-year forward PE) to arrive at a target price of Rs927. At current price, the stock trades at 19x FY12E EPS of Rs37.5 and 16X FY13E EPS of Rs46.3. Maintain Buy.

Source : Equity Bulls

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