MOSL: DIVI'S LABORATORIES (Neutral)-Unit-2 plant inspection underway – a positive surprise

​Divi's Laboratories: Unit-2 plant inspection underway – a positive surprise

(DIVI IN, Mkt Cap USD3.6b, CMP INR834, TP INR720, 14% Downside, Neutral)

• According to media reports, the US FDA has been inspecting Divi’s (DIVI) Unit-2 plant since early last week. The plant was last inspected in Dec-16 and was issued an import alert in Mar-17. The current inspection thus comes as a positive surprise as it is happening within six months of the issuance of the import alert (v/s historical trend of 12-18 months). DIVI’s stock has moved up ~15% over the past week on the back of this development. Although early re-inspection (expected to get over next few days) is a positive development, we would wait for the outcome of the inspection (nature of 483 observations, if any) before forming any view on regulatory resolution.
  
• Import alert resolution to lead to >30% upside from current levels: Assuming that this import alert gets lifted in the next six months, our FY19E EPS will increase by 18-20%. Average one-year forward P/E multiple (over the last 10 years for DIVI (pre-regulatory issues) was ~22x. Considering this, the potential fair value of DIVI could be ~INR1,050-1,100 (~22x FY19E EPS of ~INR48-50).
  
• Import alert under clause 99-32 was lifted in Jul-17: In Jul-17, the US FDA lifted the import alert under clause 99-32 on the company's Unit-II at Visakhapatnam. The US FDA issued an import alert under clauses 99-32 and 66-40 for the Vishakhapatnam facility in Mar-17, followed by a warning letter in May-17. Import alert under clause 99-32 typically comes when a company has not co-operated with the US FDA during inspection.