Divi's Laboratories (Divi's) Institutional Equity Research Pharma India DIVI IN; DIVI.BO November 3, 2014 2QF15 result review HOLD Weak F15 + Full valuation = Downgrade to Hold Current price (31 Oct) Rs 1,872 Target price Rs 1,885 Upside/(downside) % 1 Earning estimate Revised Market data Mkt capitalisation Rs bn 240.5 Average daily vol '000 139.2 52-week H/L Rs 1888 / 977 Shares O/S mn 132.7 Free float mn 63.6 Promotor holding % 52.1 Foreign holding % 19.1 Face value Rs 2.0 Price performance (%) 1m 3m 6m 1yr Nifty (abs) 4.5 9.3 24.1 31.5 Stock (abs) 1.4 21.1 31.4 83.2 Relative to Index (3.2) 11.9 7.3 51.7 Performance 2050 1800 1550 1300 1050 (Rs) 800 0 Nov-13 Feb-14 May-14 Jul-14 Oct-14 Divi's Lab. (LHS) Source: Bloomberg, SSLe (%) 50 40 30 20 10 Rel. to BSETHC (RHS) Divi s Laboratories (Divi s) reported exceptional sales and disappointed operating margins in 2QF15. Sales and adjusted profits grew 47% and 30% YoY to Rs8.3bn and Rs2.3bn, respectively. Strong sales largely resulted from bunching up of orders, which should normalize in 2H (F15e growth guidance intact ~21%). EBITDAM at 36.6% is weak (SSLe of 37% and consensus of 38%), dragged from lower gross margins of 57.8%, as the sales mix from CCS business dipped to 46% (47% in 1Q). We downgrade Divi s to HOLD with price target Rs1,885 (20x rollover forward valuation). Model changes: In view of tepid OPM for 1H, 36.6% and weak margin commentary for 2H, we lower EPS forecast for F15e by 5.7%. We also model for F17e with sales at Rs46.5bn (23% growth over F16e) and profits at Rs13.7bn (26% growth over F16e). Management commentary: While 21% sales growth is projected for F15e, the guidance on OPM is cut down to 36.5 37% (earlier 38%). In the short term, adverse business mix (low margin Generic API sales) and Vizag plant shutdown (Hudhud cyclone) have impacted the operating results, although 38 39% longterm margin will sustain. Utilisation of DSN facility appears to be normalizing. Tax rate guidance is about 21 22%. Other highlights: Forex gain during 2Q was Rs43mn included in other income. Contribution from Top 5 products remained stable at 46% of sales. Nutraceutical sales came at Rs440mn (Rs870mn in 1H). Downgrade to HOLD; price target Rs1,885: Moderation in the near-term business outlook and full valuation lead us to downgrade Divi s to HOLD from BUY. On our new EPS, P/E is at 31x for F15e and 23x for F16e, respectively. However, in the longer term we are positive on business fundamentals as we forecast elevated two-year EPS CAGR at 31% (F15e F17e) and expect high degree of operative leverage to converge into improved capital returns ratio. We raise our P/E multiple to 20x on 1-year forward EPS with DSN utilisation getting normalized. Our new price target is Rs1,885 (based on 20x rollover forward valuation on October 14). Vivek Kumar +91 22 4227 3312 vivek.kumar@sbicapsec.com Aarti Rao +91 22 4227 3450 aarti.rao@sbicapsec.com Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Net sales 21,448 25,140 30,615 37,687 46,479 growth (%) 15.1 17.2 21.8 23.1 23.3 EBITDA margin (%) 38.0 40.5 36.5 39.5 39.5 Adjusted net profit 5,906 7,413 8,002 10,872 13,662 EPS (Rs) 44.5 55.8 60.3 81.9 102.9 growth (%) 14.6 25.5 7.9 35.9 25.7 P/E (x) 22.1 24.5 31.1 22.9 18.2 EV/EBITDA (x) 15.5 17.3 21.4 15.9 12.6 Dividend yield (%) 1.8 1.7 1.3 1.7 2.1 RoE (%) 25.3 26.8 24.6 28.4 29.9 RoCE (%) 24.1 25.7 23.7 27.5 29.0 Source: Company, SSLe SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com Please refer to our disclaimer given at the last page.
Boost from bunched up orders exceptional in nature Weak margins Forex gain Quarterly financials Y/E March (Rs mn) 2QF15 2QF14 YoY (%) 1QF15 QoQ (%) 2QF15e Var. (%) Net sales 8,298 5,659 46.6 6,398 29.7 7,041 17.8 Cost of goods 3,506 1,802 2,489 2,746 Employee benefits exp. 695 562 602 634 Other Expenses 1,063 819 984 1,056 EBITDA 3,034 2,477 22.5 2,323 30.6 2,605 16.5 EBITDAM (%) 36.6 43.8 36.3 37.0 Depreciation and amort. 293 225 333 350 EBIT 2,742 2,251 21.8 1,990 37.8 2,255 21.6 EBITM (%) 33.0 39.8 31.1 32.0 Other income 146 64 142 100 Interest expenses 4 4 4 4 Extraordinary/Exceptional 43 312 14 - Profit before tax 2,927 2,624 11.5 2,142 36.6 2,351 24.5 Tax expense 630 574 463 494 Effective tax rate (%) 21.5 21.9 21.6 21.0 PAT 2,296 2,049 12.1 1,679 36.7 1,858 23.6 Minority interest - - - - Reported net profit 2,296 2,049 12.1 1,679 36.7 1,858 23.6 Non-recurring items 43 312 14 - Adj. net profit 2,253 1,737 29.7 1,666 35.3 1,858 21.3 NPM (%) 27.2 30.7 26.0 26.4 EPS (Rs) 17.0 13.1 29.7 12.5 35.3 14.0 21.3 Source: Company, SSLe vivek.kumar@sbicapsec.com I aarti.rao@sbicapsec.com November 3, 2014 2
Change in estimates: We have slashed our F15e EPS by 5.7% and decreased our F15e gross margin assumption by 270bps (due to on going adverse business mix into high generic API sales). This has compressed EBITDAM for F15e. Estimate revision (Rs mn) Revised Old Change (%) F15e F16e F15e F16e F15e F16e Sales 30,615 37,687 30,615 37,687 0.0 0.0 EBITDA 11,183 14,897 12,010 14,897 (6.9) 0.0 EBITDA margin (%) 36.5 39.5 39.2 39.5 (270) bps 0 bps Adj. PAT 8,002 10,872 8,482 10,810 (5.7) 0.6 Source: SSLe Key assumptions Y/E Mar F 15e F 16e F 17e Generic APIs growth (%) 19.0 19.0 19.0 CCS growth (%) 22.0 25.0 25.0 US$/Rs 60.0 60.0 60.0 Gross margin (%) 58.5 61.5 61.5 Staff cost % to sales 9.0 9.0 9.0 R&D spend % to sales 1.0 1.0 1.0 Tax rate (%) 21.9 22.0 22.0 Source: SSLe P/E distribution (1-year forward) 35 30 We downgrade Divi s to HOLD with price target Rs1,885 (20x rollover forward valuation) (x) 25 20 15 10 +2SD = 24.93 Mean = 20.03-2SD = 15.13 5 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: Bloomberg, SSLe November 3, 2014 3
Financials Income Statement Balance Sheet Y/E Mar (Rsmn) F13 F14 F15e F16e F17e Y/E Mar (Rsmn) F13 F14 F15e F16e F17e Net sales 21,448 25,140 30,615 37,687 46,479 Cash & Bank balances 409 358 2,515 4,574 7,221 growth (%) 15.1 17.2 21.8 23.1 23.3 Other Current assets 14,154 17,583 19,250 23,572 28,940 Operating expenses 13,297 14,951 19,432 22,790 28,106 Investments 4,078 5,046 6,308 7,885 9,856 EBITDA 8,152 10,189 11,183 14,897 18,372 growth (%) 18.1 25.0 9.8 33.2 23.3 Net fixed assets 12,121 13,661 13,819 13,901 13,909 Depreciation &amortisation 769 921 1,342 1,417 1,492 Goodwill & intangible assets - - - - - EBIT 7,382 9,268 9,841 13,480 16,880 Other non-current assets 625 1,190 1,190 1,190 1,190 Other income 334 335 417 479 656 Total assets 31,388 37,838 43,081 51,122 61,117 Interest paid 18 21 21 21 21 Extraordinary/Exceptional items 115 504 57 - - Current liabilities 4,957 6,375 6,742 8,148 9,804 PBT 7,812 10,086 10,294 13,938 17,515 Borrowings 393 184 184 184 184 Tax 1,792 2,169 2,252 3,066 3,853 Other non-current liabilities 816 1,249 1,217 1,217 1,217 Effective tax rate (%) 22.9 21.5 21.9 22.0 22.0 Total liabilities 6,167 7,808 8,142 9,549 11,205 Net profit 6,020 7,917 8,042 10,872 13,662 Minority interest - - - - - Share capital 265 266 266 266 266 Reported Net profit 6,020 7,917 8,042 10,872 13,662 Reserves & surplus 24,955 29,765 34,673 41,308 49,646 Non-recurring items (115) (504) (40) - - Shareholders' funds 25,221 30,030 34,938 41,574 49,912 Adjusted Net profit 5,906 7,413 8,002 10,872 13,662 Minority interest - - - - - growth (%) 14.6 25.5 7.9 35.9 25.7 Total equity & liabilities 31,388 37,838 43,081 51,122 61,117 Key Financials ratios Cash Flow Statement Y/E Mar F13 F14 F15e F16e F17e Y/E Mar (Rsmn) F13 F14 F15e F16e F17e Profitability and return ratios (%) Pre-tax profit 7,812 10,086 10,294 13,938 17,515 EBITDAM 38.0 40.5 36.5 39.5 39.5 Depreciation 760 886 1,342 1,417 1,492 EBITM 34.4 36.9 32.1 35.8 36.3 Chg in working capital (1,409) (2,569) (1,332) (2,916) (3,711) NPM 27.5 29.5 26.1 28.8 29.4 Total tax paid (1,609) (1,818) (2,252) (3,066) (3,853) RoE 25.3 26.8 24.6 28.4 29.9 Other operating activities - - - - - RoCE 24.1 25.7 23.7 27.5 29.0 Operating CF 5,554 6,585 8,053 9,373 11,443 RoIC 28.5 29.8 28.9 36.6 41.0 Capital expenditure (3,681) (2,425) (1,500) (1,500) (1,500) Chg in investments 692 (968) (1,262) (1,577) (1,971) Per share data (Rs) Other investing activities - - - - - O/s shares (mn) 132.7 132.8 132.8 132.8 132.8 Investing CF (2,989) (3,393) (2,762) (3,077) (3,471) EPS 44.5 55.8 60.3 81.9 102.9 FCF 2,565 3,192 5,291 6,296 7,972 FDEPS 44.5 55.8 60.3 81.9 102.9 Equity raised/(repaid) - 0 - - - CEPS 50.3 62.8 70.4 92.6 114.2 Debt raised/(repaid) (136) (209) (0) - - BV 190.0 226.2 263.2 313.2 376.0 Dividend (incl. tax) (2,329) (3,106) (3,134) (4,237) (5,324) DPS 17.5 23.4 23.6 31.9 40.1 Other financing activities 0 71 0 (0) (0) Financing CF (2,466) (3,243) (3,134) (4,237) (5,324) Valuation ratios (x) Net chg in cash & bank bal. 100 (51) 2,157 2,059 2,648 PE 22.1 24.5 31.1 22.9 18.2 Closing cash & bank bal 409 358 2,515 4,574 7,221 P/BV 5.2 6.1 7.1 6.0 5.0 EV/EBITDA 15.5 17.3 21.4 15.9 12.6 EV/Sales 5.9 7.0 7.8 6.3 5.0 Other key ratios D/E (x) 0.0 0.0 0.0 0.0 0.0 DSO (days) 85.7 94.6 94.6 94.6 94.6 Du Pont Analysis - RoE NPM (%) 27.5 29.5 26.1 28.8 29.4 Asset turnover (x) 0.9 0.9 0.9 1.0 1.0 Equity multiplier (x) 1.1 1.0 1.0 1.0 1.0 RoE (%) 25.3 26.8 24.6 28.4 29.9 Source: Company, SSLe November 3, 2014 4
Recommendation History 2000 1800 1600 (Rs) 1400 1200 1000 BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 7-Feb-13 1,064 1,393 BUY 4-Mar-13 1,041 1,393 BUY 20-May-13 1,082 1,323 BUY 2-Aug-13 927 1,323 BUY 8-Nov-13 1,020 1,367 BUY 3-Feb-14 1,313 1,551 BUY 23-May-14 1,296 1,575 BUY 14-Aug-14 1,461 1,690 BUY 31-Oct-14 1,872 1,885 HOLD 800 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai -400013. Tel.: 91-22-42273300/01 Fax: 91-22-42273335 Email: sbicapresearch@sbicapsec.com www.sbismart.com KEY TO INVESTMENT RATINGS (w.e.f. 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