MOSL: DIVI'S LABORATORIES (Neutral)-US FDA clears Unit-2-positives already priced in

​Divi's Laboratories: US FDA clears Unit-2; positives already priced in

(DIVI IN, Mkt Cap USD4.4b, CMP INR1074, TP INR1100, 2% Upside, Neutral)

• ​Divi's Laboratories (DIVI) announced that the US FDA will lift the import alert under clause 66-32 at the Vishakhapatnam-based Unit-2 facility. Exposure to the US market from Unit-2 stands at ~22% of total sales (pre-import alert). This has been one of the fastest resolutions post receipt of the import alert in Mar-17.
  
• Import alert under clause 99-32 was lifted in Jul-17: In July-17, the US FDA lifted the import alert under clause 99-32 on the company's Unit-2 at Visakhapatnam. The FDA had issued an import alert under clauses 99-32 and 66-40 in March 2017 and a warning letter in May 2017 for the Vishakhapatnam facility. Import alert under clause 99-32 typically comes when a company has not co-operated with the US FDA during inspection.
  
• Focus back on business: DIVI reported revenue of INR40.9b in FY17. Sales are expected to decline by ~10% YoY in FY18 due to the impact of the import alert. Given that the company has not lost any meaningful business contracts during the import alert period and no structural change was required during the remediation process, sales should immediately bounce back to FY17 levels, in our view. Post resolution of the import alert, we expect FY19 sales to bounce back to INR43.9b (7% YoY growth on base of FY17 as capacity expansion at Unit-1/2 will be ready for commercialization). Post resolution, higher sales from Unit-2 (tax-exempted site) will help bring down the consolidated tax rate.