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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.