MOSL: DIVI'S LABORATORIES (Neutral)-Strong growth partly on low base; On track to improve profitability

Divi's Laboratories: Strong growth partly on low base; On track to improve profitability

(DIVI IN,Mkt Cap USD4.7b, CMP INR1208, TP INR1270, 5% Upside, Neutral)

Revenue growth and lower operational costs drive earnings: DIVI’s’ revenue grew 21% YoY to INR10b (our estimate of INR10.5b). The strong YoY growth came partly on the back of last year’s low base. The business slowdown at Unit-I due to compliance-related activities during the quarter impacted the growth to some extent. Gross margin expanded by ~200bp YoY to 62%, but contracted by ~100bp QoQ due to change in product mix, higher prices of solvents on account of hike in crude oil prices and increase in prices of key starting material procured from China. EBITDA margin improved more sharply than gross margin by 554bp YoY to 35.4% for the quarter, driven largely by a reduction in costs related to remediation measures. Other expenses, as a percentage of sales, declined from 18.2% in 1QFY18 to 14.1% in 1QFY19. EBITDA grew 43.7% YoY to INR3.5b (our estimate of INR3.7b). PAT growth at 39% YoY was higher than EBITDA growth, led by forex gain of INR270m. After adjusting for the forex gain, PAT stood at INR2.5b (our estimate of INR2.8b).

Other highlights:

• In 1QFY19, generic sales contributed 57%, while CRAMS contributed 43%. Nutraceuticals sales grew sharply by 61% YoY to INR920m for the quarter, largely on account of higher volume off-take by customers.
• DIVI’s has guided for a tax rate of 26% for FY19, which is lower than the FY18 level, as normalcy has resumed at its Unit-II SEZ facility.
• The greenfield project at Kakinada remains stuck due to land acquisition issues. DIVI’s is considering an alternate site to carry out its expansion activities.
• The company incurred a capex of INR1.2b in 1QFY19 and remains on track to spend about INR4b-5b over FY19. DIVI’s capital work-in-progress stands at about INR1.8b.