MOSL: DIVI'S LABORATORIES (Neutral)-Strong beat on earnings

Divi's Laboratories: Strong beat on earnings

(DIVI IN, Mkt Cap USD4.5b, CMP INR1254, TP INR1390, 11% Upside, Neutral)

• Quarterly EBITDA highest in past 18 quarters: DIVI’s revenue grew significantly by ~44% YoY to INR12.9b (v/s est. of INR10.7b). The strong YoY growth was led by (a) normalization of operations post resolution of warning letter, and (b) opportunities due to slowdown in supplies from Chinese competitors. Superior product mix led gross margins to expand by ~330bp YoY (+150bp QoQ) to 63%. In addition, improved operating leverage with higher capacity utilization led EBITDA margin to expand ~890bp YoY to 40%. This is the highest margin recorded by the company in the last 18 quarters. Revenue growth coupled with margin expansion led to ~86% YoY growth in EBITDA to INR5.1b (v/s est. of INR3.8b). Other income saw forex gains of INR528m against INR106m YoY. PAT stood at INR4b up ~92% YoY (our est.: INR2.8b). For 1HFY19, sales stood at INR22.8b (+33% YoY), EBITDA at INR8.7b (+66% YoY) and PAT at INR6.6b (+53% YoY).
• Other highlights:
• During the quarter, generic sales constituted 57% of total sales, while CRAMS formed 43%. With strong off-take from customers, nutraceutical sales reached INR1.1b in 2QFY19.
• DIVI incurred capex of INR2.4b in 1HFY19. It has revised its capex outlay at SEZ Unit-2 by INR2b to INR6b. DIVI has also lined up capex of INR6b at available land at Unit-1. DIVI is also taking up debottlenecking program at SEZ Unit-1/2 with an additional investment of INR3b. Thus, overall capex would be ~INR15b, which would be spent over the next two years to cater to the increasing generic business and innovator’s increased outsourcing to DIVI.