Buy Divis Labs; target of Rs 1450: Motilal Oswal

Motilal Oswal is bullish on Divis Labs and has recommended buy rating on the stock with a target of Rs 1450 in its February 4, 2013 research report.
 
“Divi's Lab reported 29% YoY growth in revenues to INR5.33b (v/s est of INR5.41b), EBITDA grew 22% to INR1.81b (v/s est of INR1.98b) and Adj PAT was up 18% to INR1.44b (est of INR1.47b). EBITDA margins at 34% (down 180bp YoY) were below est of 36.7%. There was a forex gain of INR160m in 3QFY13 (in other income), v/s a forex gain of similar amount in 3QFY12 (for 2QFY13, there was a forex loss of INR208m included in other expenses). Revenue growth was driven by 37% in CRAMS business, while generics grew 25%. Nutraceuticals revenues declined 8% to INR185m. Management indicated there was 2-3% currency benefit in top line for the quarter.”
 
“EBITDA margins are lower than estimates due to unfavorable product mix, which pushed the raw material costs up by 200bp YoY to 41.5% of sales. We expect margins to improve from 3QFY13 levels. Management retained its 20-25% top line growth guidance for FY13, while lowering the revenue guidance for Nutraceuticals to INR900m (earlier INR1-1.1b). USFDA inspection of new units at Vizag is expected in 1QFY14 (as indicated earlier). EBITDA margins will be under pressure due to lower-than-expected traction in business and the higher power/fuel costs.”
 
“Based on 3QFY13 performance, we have lowered EPS estimates for FY13E/14E/ 15E by 4%/5%/2% to reflect increased pressure on EBITDA margins. We estimate 22% revenue CAGR, 23% EBITDA CAGR and 21% EPS CAGR for FY12-15E led by both generics and CRAMS business segments but partly tempered down by higher tax rate. We estimate 35-37% RoCE and 28-29% RoE over FY13E-15E, led by traction in high-margin CRAMS business, sustained profitability in generics business and increased contribution from the new SEZ. Company is targeting a fresh capex of INR1.5-2b for FY13 despite the ~INR4.5b capex undertaken in the past two years, which reflects confidence on the growth outlook. The stock trades at 18.3x FY14E and 14.7x FY15E earnings. Buy with a target price of INR 1450 (20x FY15E EPS),” says Motilal Oswal research report.

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