COMPANY UPDATE 21 MAR 2017

Divis Laboratories
BUY
INDUSTRY PHARMA Bottomed out?
The US FDA has finally put an end to speculation assuming such optimisation nor further regulatory
CMP (as on 21 Mar 2017) Rs 634 trouble from other authorities in our estimates.
about the outcome of its Dec-16 inspection of Divis
Target Price Rs 735 Labs (DIVI) Unit 2 facility in Vizag by issuing an Lack of visibility on CRAMs: DIVI is a preferred
Nifty 9,122 import alert (IA). However, the US FDA has also partner for most top Pharma MNCs. Over the years, it
exempted 10 key products in which DIVI has a has added value to the R&D process for its partners,
Sensex 29,485
significant market share in the US. Post the IA, we and presently enjoys preference over other less-
KEY STOCK DATA established CRAMs players. However, the IA now
have cut our base case earnings estimates by 20-
Bloomberg DIVI IN 25% for FY18/FY19E. Our estimates do not include creates uncertainty regarding the continued success
No. of Shares (mn) 265 the potential incremental impact of further of the custom synthesis business.
MCap (Rs bn) / ($ mn) 168/2,581 regulatory action by other authorities, or the View and valuation: Overall, we have cut our base
6m avg traded value (Rs mn) 1,288 possibility of customers choosing to procure their case top line numbers by ~16% and earnings by 20-
APIs from other sources. In order to factor in these 25% over FY18-19E, and lowered our base case
STOCK PERFORMANCE (%)
risks as well, we have lowered our base case multiple from 20x to 16x in order to adequately
52 Week high / low Rs 1,382/628 factor in all the risks. We believe that this regulatory
multiple from 20x to 16x on FY19 EPS. We maintain
3M 6M 12M overhang will last for at least a year. However, in our
a BUY rating, arriving at a target price of Rs 735.
Absolute (%) (44.8) (52.3) (36.0) view, the erosion of over 50% of DIVIs market cap
Some relief as key products are exempted: The FDA
represents a disproportionate reaction by the
Relative (%) (57.1) (55.7) (52.7) has exempted 10 products from the IA- Naproxen,
market, and the CMP holds little or no downside.
SHAREHOLDING PATTERN (%) Gabapentin, Levetiracetam, Capacitabine, Atoquone,
Promoters 52.1 Lamotrigine, Chloropurine, Raltegravir, Capecitabine, In our bull case scenario, assuming DIVI will
BOC core succinate and 2,4-wing active ester. DIVI is undertake the aforementioned optimisation,
FIs & Local MFs 14.6 experience no customer fallout post IA and receive
the market leader in most of these products, with 40-
FIIs 19.8 no further regulatory shocks, we would arrive at a TP
70% market share. These exemptions will certainly
Public & Others 13.6 help to reduce the overall impact of this setback. of Rs. 900 (18x FY19EPS of Rs. 50/sh).
Source : BSE Importance of Unit 2: Unit 2 contributes ~65% to Financial Summary
total sales. However, exposure to the US API generics Year Ending March FY16 FY17E FY18E FY19E
Amey Chalke is only ~25% of the top line, the sales of which could Net Sales (Rs mn) 37,876 42,529 40,829 45,620
amey.chalke@hdfcsec.com be directly affected by the IA. DIVI has another plant EBITDA (Rs mn) 14,250 15,678 13,911 16,367
+91-22-6171-7321 (Unit-1) in Vizag, where most of its products are APAT (Rs mn) 11,118 11,784 10,357 12,204
manufactured. Barring any customer objections, DIVI Diluted EPS (Rs) 41.9 44.4 39.0 46.0
Siddhant Mansukhani can optimise its production of non-exempted P/E (x) 15.1 14.3 16.3 13.8
siddhant.mansukhani@hdfcsec.com products by shifting them to Unit-1. This will further RoE (%) 28.6 25.1 19.0 19.8
+91-22-6639-2476 soften the IA impact. For now, we are neither Source: Company, HDFC sec Inst Research # Consolidated
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
 DIVIS LABS : COMPANY UPDATE

Post receipt of the import Divis Labs In Charts

alert, we have cut our
revenue estimates for FY18E Revenue Trend Generic Business Revenue Growth Trend
Revenue (Rs bn) YoY Growth (%) Total Generics (Rs bn) YoY Growth (%)
and FY19E. Expect revenue to
take a hit in FY18 and recover 42.2 39.4
to an extent in FY19 24.5
24.3
18.6
22.9 21.7 15.4
10.8
18.0 6.5
15.1 11.7
12.2
The generics business revenue
will take the brunt of the
import alert impact and we (4.1)
(25.5)
expect a decline over FY17- 19 21 25 31 38 42 41 45 9 10 12 15 19 21 15 16
19E
FY12

FY13

FY14

FY15

FY16

FY12

FY13

FY14

FY15

FY16
FY17E

FY18E

FY19E

FY17E

FY18E

FY19E
DIVI is a preferred partner for Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
most top Pharma MNCs, and
presently enjoys an
advantage over other less- CMS Revenue Growth Trend Gross Margin - Trajectory
established CRAMs players. Total CMS (Rs bn) YoY Growth (%) Gross Profit (Rs bn) Gross Margin (%)
46.3
However, the import alert has 63.8
now created an uncertainty 62.7
regarding the continued 61.5
success of the custom 60.9
60.2
synthesis business 60.1
20.3 59.5
15.1 15.5 19.3 59.0
15.3 13.6
12.4
Gross margins will be dented
in FY18E 9 10 12 14 17 19 22 25 11 13 16 19 23 26 24 27

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 DIVIS LABS : COMPANY UPDATE

EBITDA Margin - Trajectory R&D Expenses - % Of Sales

Similarly, there will be a
EBITDA (Rs bn) EBITDA Margin (%) R&D Expenses (Rs mn) As a % of sales
knock- on effect on the 1.1
40.1
EBITDA margin. Negative 1.0 1.0
operating leverage and 0.9 0.9 0.9 0.9
38.0 37.4 0.8
37.6
incremental remediation costs 37.0 36.9
will also contribute to the 35.9
reduction in the EBITDA
margin 34.1

7 8 10 12 14 16 14 16 189 240 254 277 309 381 435 488

FY12

FY13

FY14

FY15

FY16

FY12

FY13

FY14

FY15

FY16
FY17E

FY18E

FY19E

FY17E

FY18E

FY19E
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Post the import alert, we have

revised our earnings EPS Growth Trend Return Ratios
Adj. EPS (Rs/sh) YoY Growth (%) ROE (%) ROCE (%)
estimates and now see flat
30.6
growth over FY17-19E 28.5 34.9
32.8
34.4
23.5 30.8 31.5 30.8
17.8 26.6
12.9 10.1 24.7
6.0 28.0 28.6
26.8 25.7 26.3 25.1

19.0 19.8
While return ratios are
traditionally high for DIVI, it (12.1)
will take some time for them 20.1 22.7 29.1 32.1 41.9 44.4 39.0 46.0
to return to historical levels
FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E
after the import alert

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 DIVIS LABS : COMPANY UPDATE

Income Statement (Consolidated) Balance Sheet (Consolidated)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 31,149 37,876 42,529 40,829 45,620 SOURCES OF FUNDS
Growth (%) 23.0 21.6 12.3 (4.0) 11.7 Share Capital - Equity 531 531 531 531 531
Material Expenses 12,132 15,053 16,318 16,468 18,079 Reserves 34,423 42,346 50,595 57,327 64,649
Employee Expenses 2,904 3,649 4,535 3,863 4,088 Total Shareholders Funds 34,954 42,877 51,126 57,857 65,180
Other Expenses 4,184 4,614 5,616 6,221 6,677 Long Term Debt 11 5 5 5 5
R&D Expenses 277 309 381 366 409 Short Term Debt 256 420 420 420 420
EBITDA 11,652 14,250 15,678 13,911 16,367 Total Debt 266 425 425 425 425
EBITDA Margin (%) 37.4 37.6 36.9 34.1 35.9 Net Deferred Taxes 1,262 1,451 1,451 1,451 1,451
EBITDA Growth (%) 14.9 22.3 10.0 (11.3) 17.7 Long Term Provisions & Others 70 116 116 116 116
Depreciation 1,360 1,182 1,411 1,426 1,588 TOTAL SOURCES OF FUNDS 36,552 44,868 53,117 59,849 67,172
EBIT 10,292 13,068 14,267 12,486 14,779 APPLICATION OF FUNDS
Other Income (Including EO Net Block 13,089 14,388 16,847 21,121 24,533
447 736 865 828 903
Items) CWIP 2,182 2,639 3,200 2,500 2,750
Interest 19 23 25 35 35 Investments - 0 0 0 0
PBT 10,721 13,781 15,107 13,278 15,646 LT Loans & Advances 1,057 1,670 1,900 2,250 2,450
Tax (Incl Deferred) 2,206 2,662 3,324 2,921 3,442 Total Non-current Assets 16,327 18,697 21,947 25,872 29,734
RPAT 8,515 11,118 11,784 10,357 12,204 Inventories 11,626 12,078 15,683 15,045 16,807
APAT 8,515 11,118 11,784 10,357 12,204 Debtors 7,416 8,809 11,444 10,979 12,265
APAT Growth (%) 10.1 30.6 6.0 (12.1) 17.8 Other Current Assets 699 1,317 1,272 1,220 1,363
Adjusted EPS (Rs) 32.1 41.9 44.4 39.0 46.0 Cash & Equivalents 7,982 8,742 12,573 16,343 18,589
Source: Company, HDFC sec Inst Research Total Current Assets 27,724 30,946 40,971 43,587 49,023
Creditors 4,298 4,727 5,934 5,693 6,359
Other Current Liabilities &
3,201 48 3,867 3,917 5,226
Provns
Total Current Liabilities 7,500 4,775 9,801 9,610 11,585
Net Current Assets 20,224 26,172 31,170 33,977 37,438
TOTAL APPLICATION OF FUNDS 36,552 44,868 53,117 59,849 67,172
Source: Company, HDFC sec Inst Research

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 DIVIS LABS : COMPANY UPDATE

Cash Flow Key Ratios

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 10,721 13,781 15,107 13,278 15,646 PROFITABILITY (%)
Interest expenses (net of GPM 63.9 61.1 60.3 61.6 59.7
(428) (713) (840) (792) (868)
income) EBITDA Margin 40.1 37.4 37.6 36.9 34.1
Depreciation 1,360 1,182 1,411 1,426 1,588 APAT Margin 30.5 27.3 29.4 27.7 25.4
Working Capital Change (1,322) (5,754) (1,398) 613 (1,415) RoE 26.3 28.6 25.1 19.0 19.8
Tax Paid (2,206) (2,662) (3,324) (2,921) (3,442) RoIC (or Core RoCE) 31.2 34.0 30.4 24.4 26.4
OPERATING CASH FLOW ( a ) 8,125 5,833 10,956 11,603 11,510 RoCE 31.5 34.4 30.8 24.7 26.6
Capex (248) (574) (4,700) (5,000) (5,250) EFFICIENCY
Free cash flow (FCF) 7,877 5,259 6,256 6,603 6,260 Tax Rate (%) 20.6 19.3 22.0 22.0 22.0
Investments (2,311) (695) 500 - - Fixed Asset Turnover (x) 1.6 1.7 1.6 1.3 1.2
Non-operating Income 716 1,005 1,134 828 903 Inventory (days) 136.2 116.4 134.6 134.5 134.5
INVESTING CASH FLOW ( b ) (1,843) (264) (3,066) (4,172) (4,347) Debtors (days) 86.9 84.9 98.2 98.1 98.1
Debt Issuance/(Repaid) 87 158 - - - Other Current Assets (days) 8.2 12.7 10.9 10.9 10.9
Interest Expenses (19) (23) (25) (35) (35) Payables (days) 50.4 45.6 50.9 50.9 50.9
FCFE 6,351 5,704 7,866 7,395 7,127 Other Current Liab & Provns (days) 37.5 0.5 33.2 35.0 41.8
Share Capital Issuance (266) 0 0 (0) - Cash Conversion Cycle (days) 143.5 168.0 159.6 157.6 150.8
Dividend (3,195) (3,195) (3,535) (3,625) (4,882) Debt/EBITDA (x) 0.0 0.0 0.0 0.0 0.0
Others (566) (1,749) - - - Net D/E (x) (0.2) (0.2) (0.2) (0.3) (0.3)
FINANCING CASH FLOW ( c ) (3,958) (4,809) (3,560) (3,660) (4,917) Interest Coverage (x) 448.8 553.4 563.4 571.9 353.0
NET CASH FLOW (a+b+c) 2,324 760 4,330 3,771 2,246 PER SHARE DATA (Rs)
Closing Cash & Equivalents 7,982 8,742 5,048 8,818 11,064 EPS 32.1 41.9 44.4 39.0 46.0
Source: Company, HDFC sec Inst Research Dividend 10.0 10.0 11.4 11.7 15.7
Book Value 131.7 161.5 192.6 217.9 245.5
VALUATION
P/E (x) 19.8 15.1 14.3 16.3 13.8
P/BV (x) 4.8 3.9 3.3 2.9 2.6
EV/EBITDA (x) 13.8 11.2 10.0 11.0 9.2
EV/Revenues (x) 5.2 4.2 3.7 3.7 3.3
OCF/EV (%) 5.1 3.6 7.0 7.6 7.7
FCF/EV (%) 4.9 3.3 4.0 4.3 4.2
FCFE/Mkt Cap (%) 3.8 3.4 4.7 4.4 4.2
Dividend Yield (%) 1.6 1.6 1.8 1.8 2.5
Source: Company, HDFC sec Inst Research

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 DIVIS LABS : COMPANY UPDATE

RECOMMENDATION HISTORY
Divis TP Date CMP Reco Target
1,400 15-Mar-17 761 BUY 885
21-Mar-17 634 BUY 735
1,200

1,000

800

600

400 Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Aug-16
Apr-16

Jan-17
Jul-16

Sep-16

Feb-17
Nov-16
Jun-16
May-16

Dec-16
Mar-16

Mar-17
Oct-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 DIVIS LABS : COMPANY UPDATE

Disclosure:
We, Amey Chalke, MBA and Siddhant Mansukhani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board : +91-22-6171-7330 www.hdfcsec.com

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