Buy Divi’s Laboratories; target of Rs 1800: ICICI Direct

ICICI Direct's research report on Divi’s Laboratories

Q3FY19 results were slightly better than I-direct estimates on the revenues and EBITDA front while net profit was lower due to lower other income (impact of adverse forex) • Revenues grew ~29% YoY to Rs 1343 crore against I-direct estimates of Rs 1308 crore on the back of strong traction in both the business segments (CS and Generics)• EBITDA margins improved 755 bps to 39.0% (I-direct estimates of 39.0%) mainly due to strong gross margins and despite forex losses. EBITDA grew ~61% YoY to Rs 523.3 crore • Net profit grew ~69% to Rs 379.5 crore (I-direct estimate: Rs 410 crore) mainly due to a strong operational performance.

Outlook

With ~32% growth in 9MFY19, the company has effectively captured opportunities with planned bottlenecking in the last three years albeit on a lower base and currency tailwinds. To further augment the capacities besides preparing for growing opportunities arising due to China factor, the company has earmarked an aggressive capex of ~Rs 1500 crore (including maintenance capex), over and above ~Rs 1000 crore spent in the last three years. The greenfield expansion at Kakinada is still some time away but this delay is unlikely to have material impact on the growth due de-bottlenecking at existing plants. Margins are also likely to get support from extensive backward integration, product mix and operating leverage. We ascribe a target price of Rs 1800 based on 26x FY20E EPS of Rs 69.2.