Buy Divis Labs; target of Rs 927: Motilal Oswal

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Buy Divis Labs; target of Rs 927: Motilal Oswal

Motilal Oswal is bullish on Divis Labs and has recommended buy rating on the stock with a target of Rs 927 in its August 8, 2011 research report.

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Motilal Oswal is bullish on Divis Labs and has recommended buy rating on the stock with a target of Rs 927 in its August 8, 2011 research report.

"DIVI's revenue grew 36% YoY to INR3.59b, against our estimate of INR3.27b, EBITDA grew 29%YoY to INR1.28b, against our estimate of INR1.22b and adjusted PAT grew 22.5% YoY to INR1.02b, against our estimate of INR1b. Top-line growth was better than estimates due to improved supplies of existing APIs, a ramp-up for 14 new APIs launched in FY11 and better-than-expected recovery in the CCS segment. Despite strong top-line growth, EBITDA grew by 29% YoY to INR1.28b against our estimate of INR1.22b because of an adverse product mix. EBITDA margins contracted 193bp YoY to 35.6%. Adjusted PAT grew 22.5% YoY to INR1.02b, which was in line with our estimate of INR1b but lower than top-line and EBITDA growth due to higher-than-expected taxes. The effective tax rate for 1QFY12 was 21% compared with our estimate of 15%."

"DIVI's performance suffered in FY10 and 1HFY11 due to customer de-stocking, which now seems to have corrected. Its CCS business recovered over the past two quarters. We are positive about the prospects of pharmaceutical outsourcing from India, given the unique combination of low costs and chemistry skills that India offers. We expect DIVI to be a key beneficiary of increased pharmaceutical outsourcing from India, given its strong relationships with global innovator pharmaceutical companies. It has undertaken large capex of INR2b to set up a new SEZ, implying positive prospects for the outsourcing business (generally DIVI does not undertake capex without adequate revenue visibility from customers)."

"We estimate 24% revenue CAGR over FY11-13 led by the API and CCS segments and a ramp-up in neutraceutical revenue. We expect a slightly lower 19.7% EPS CAGR due to a significant increase expected in the tax rate from 9% to 20%. The stock trades at 21.9x FY12E and 16.9x FY13E consolidated earnings. Maintain Buy with a target price of INR 927 (20x FY13E EPS)," says Motilal Oswal research report. 

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To read the full report click on the attachment