Divi’s Lab delivered a strong quarter with good sales and Ebitda margin. The company has provided sales growth guidance of 20%/20-25% for FY14/15. We increase FY14/15E EPS by 7%/9% and downgrade the stock to ‘sell’ (from add) with a target price of R1,200 (from R1, 090 earlier) given the unfavorable risk-reward after the recent rally and weak cash generation despite strong P&L growth.
The stock is valued at 18X FY15E EPS.
Divi’s net profit at R220 crore (52% y-o-y) is significantly ahead of estimates. Sales at R690 crore (29% y-o-y) are 7% ahead of estimates. The company indicated that there has been strong growth across key molecules.
Ebitda at R280 crore (58% y-o-y) is 15% higher than estimates with margin at 41.6% (760 bps higher y-o-y), higher by 280 bps. The beat in Ebitda margin is driven by better product mix, currency benefit and lower power cost. Other income at R9.8 crore was lower y-o-y due to forex gain of R16 crore in the base period.
The cash generation during 9MFY14 remained weak despite the strong P&L performance (39% y-o-y EPS growth). Net cash is at R340 crore at the end of December 2013 versus R410 crore in FY2013. The weak cash generation has been primarily due to higher capital expenditure at R250 crore for 9MFY14. The company has guided for R350 crore in capex for FY2014, which is higher than the guidance of R200 crore (provided in Q2FY14).