Neutral Divi`s Laboratories Ltd For Target Rs.3,330 - Motilal Oswal Financial Services Ltd
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Pricing pressure in API segment hurts profitability
CS segment sales to pick up pace in the coming quarters
* Divis Lab (DIVI) delivered a miss on 2QYF24 earnings. While revenue was in line with estimates, profitability was lower than expectation, partly due to lower pricing in the generic API segment.
* We reduce our earnings estimate by 5%/3% for FY24/FY25, factoring in a) increased competition in the API segment, and b) higher tax rate, partly offset by improved growth momentum in the Nutraceutical business. We value DIVI at 35x 12M forward earnings to arrive at a price target of INR3,330.
* We are building 25% earnings CAGR over FY23-25 (adjusting for COVID-led business in FY23). This is on the back of improved visibility for contracts in the custom synthesis segment as well as ramp-up in products in contrast media space. We believe the current valuation adequately factors the upside in earnings. We reiterate our Neutral stance on the stock.
Product mix/reduced operating leverage lowered margin YoY
* DIVI’s revenues grew 2.2% YoY to INR19.1b (our est: INR19.3b) for the quarter.
* Adjusting for COVID-related inventory write-off (INR200m), gross margin contracted 500bp YoY to 58.6% due to a change in product mix.
* EBITDA margin contracted at a higher rate by 740bp YoY to 26.1% (our est: 29.2%), largely due to lower GM and higher employee cost/other expenses (up 140bp/90bp as a % of sales).
* As a result, EBITDA was down 19.7% YoY to INR4.9b (our est: INR5.6b) for the quarter.
* Tax rate was 25.8% in 2QFY24 as compared to 27.5%/19.8% for 1QFY24/2QFY23.
* Adjusted for INR90m in Extra-ordinary expense, PAT was down 24.4% YoY to INR3.5b (our est: INR4.3b).
* During 1HFY24, Revenue/EBITDA/PAT declined 10%/32%/37% YoY to INR37b/INR10b/INR7b.
Highlights from the management commentary
* On Ex-COVID basis, the YoY sales growth was at a healthy double digit for the quarter.
* The generics: CS ratio was 60:40 for the quarter. This implies 5% YoY growth in the generics segment for the quarter.
* While volume growth was robust in the generics segment, the pricing pressure negatively impacted YoY sales growth of this segment.
* The nutraceutical sales were INR2b during the quarter, up 11% YoY.
* The commercial benefits from the two major CS projects are anticipated to materialize starting 2HFY24 onwards.
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