Accumulate Divis Labs; target of Rs 1280: Dolat Capital

Dolat Capital is bullish on Divis Laboratories and has recommended accumulate rating on the stock with a target of Rs 1280 in its August 7, 2012 research report.

“Divi’s Labs’ (Divi’s) Q1FY13 revenues grew 29.8% YoY to Rs 4.7bn mainly driven by scale-up in capacity utilization of DSN SEZ unit and increased order flow. Growth on account of foreign currency movement was only 4-5%. Revenue from custom synthesis business (48% of sales) grew 22% YoY to Rs 2.15bn, while API sales (52% of sales) grew 38% YoY to Rs 2.33bn. Carotenoids contributed Rs 210mn of sales against Rs 140mn in Q1FY12. DSN SEZ unit (commercialized in FY12) contributed sales of Rs 400mn (7% of the topline). Two additional blocks are expected to go on stream in Q2FY13E and the DSN SEZ facility will acquire FDA approval by H2FY13E. Full capacity utilization expected in H1FY14E.” 

“Operating margins stood higher by 450bps YoY to 40.8%, mainly on account of 550bps YoY decline in raw material costs (aided by better product mix). Other expenses also declined by 20bps YoY while higher employee costs (up 120bps YoY) restricted margin expansion. Other income stood at Rs 407mn which included forex gain of ` 300mn. Tax rates during the quarter stood higher at 21.9% (21% in Q1FY12). Consequently, reported PAT for the quarter grew 63.2% YoY to Rs 1.67bn. We have increased our FY13E/14E earnings estimate by 6.2% / 3.3% to reflect higher EBITDA margins on account of favourable sales mix and currency benefits.”

"We expect 24% revenue growth over FY12-14E mainly led by increased order flows and ramp up in its new facility at Vizag SEZ (translates into higher operating leverage). Debt free balance sheet and controlled capex enables Divis to generate healthy cash flows which inturn reflects in its high return ratios. At CMP, the stock trades at 21.2x FY13E and 17.2x FY14E earnings. We recommend Accumulate with a revised target price of Rs 1280 (20x FY14E EPS),” says Dolat Capital research report.

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