Hold Divi’s Laboratories; target of Rs 1090: ICICI Direct

ICICI Direct's research report on Divi’s Laboratories

Revenues declined 12% YoY to Rs 890 crore (I-direct estimate: Rs 959 crore), mainly due to loss of sales and delays of export shipments of exempted products related to the import alert on the Divis plant (Vizag Unit 2) by the USFDA EBITDA margins reported 218 bps increase to 31.1% and came in below I-direct estimate of 32.6% mainly due to higher than estimated employee costs PAT declined 8% to Rs 207 crore (I-direct estimate: Rs 228 crore) mainly due to a below expected operational performance.

Outlook

The performance is expected to improve post the removal of import alert and warning letter for the Vishakhapatnam unit 2 facility by the USFDA. The impacted revenues are in the range of mere 3-4% of total revenues, due to exemption of key products from the import alert. Post removal of import alert, we see our concerns easing on two fronts - 1) margins to revert to 36-37% and 2) reducing threat of losing clients especially in the CS space due to cGMP related alert. Although concerns remain over the capacity constraint scenario due to a delay in greenfield expansion at the Kakinada facility, the company has expanded capacity in the existing Hyderabad and Vizag facilities, reducing the capacity utilisation from earlier ~90% to 84% currently. We have a HOLD rating on the stock, as the current run-up in the stock price justifies the current fundamentals. We have increased the multiple to 22x (from earlier 16x) and value the stock at Rs 1090.