MOSL: DIVI’S LABORATORIES (Neutral)-Backward integration benefits offset by higher opex related to compliance
Divi’s Laboratories: Backward integration benefits offset by higher opex related to compliance
(DIVI IN, Mkt Cap USD7.3b, CMP INR1964, TP INR1845, 6% Downside, Neutral)
Capex program on track
- DIVI is almost at the end of significant capacity expansion worth INR17b to cater to the increasing generics business and innovator's increased outsourcing. Lower Nutraceutical sales impacted DIVI's 3QFY20 performance; however, we believe that the company is well positioned to benefit from the CRAMS opportunity over the next 4-5 years.
- We reduce our EPS estimate by 3%/2% for FY20/FY21E, primarily to factor in the reduction in Nutraceutical sales and the higher opex related to compliance. We maintain Neutral on adequate valuation.
Marginally below estimate
- 3QFY20 sales grew a marginal 2.7% YoY to INR14b (v/s est. INR14.7b).
- Gross margin shrank 440bp YoY to 60.8%, largely due to inferior product mix and higher raw material cost.
- EBITDA margin contracted at lower rate of 380bp YoY to 35.4%. EBITDA at INR4.9b (v/s est. INR5.3b) declined 7.3% YoY for the quarter.
- EBITDA was mainly affected by impaired Gross margins and higher staff cost (+90bp YoY as % of sales), off-setting the benefit of improved other expenses (-150bp YoY as % of sales).
- PAT declined 11.2% YoY to INR3.5b (v/s est. INR3.9b) due to higher tax rate.
Divi's Laboratories is a manufacturer of Active Pharmaceutical Ingredients and Intermediates. The major portion of its turnover is on account of export of its products to European and American countries. Co.'s product portfolio comprises two segments i) Generic APIs (active pharma ingredients) and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants. Co. has two Subsidiaries viz., Divis Laboratories (USA) Inc., and Divis Laboratories Europe AG looking after manufacturing and marketing of Neutraceutical products in North American and European Countries.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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