3QFY18 was Divi’s Labs’ first quarter post the lifting of the import alert on Unit II, and the recovery began well. The top-line came in at Rs 1,040 crore, (inline with estimates), up 8%/17% Y-o-Y/Q-o-Q. Strong growth in the CMS (+10% y-o-y) and nutraceuticals businesses boosted the top-line. Management believes that normal service has now resumed after the regulatory setback. EBITDA came in at ~Rs 340 crore, a margin of 33% (100bps below estimates), down 650bps y-o-y but up 180bps q-o-q, impacted by a combination of lower gross margin and higher operating costs (partly non-recurring). PAT was R220 crore (down 16% y-o-y, up 9% q-o-q), which included the impact of a R16 crore forex loss (vs. gain in corresponding sequential and y-o-y quarters). Given the strong sequential recovery, the management’s expectation of a strong 2HFY18 is playing out. With the regulatory hurdles now in the past, DIVI’s focus has turned to addressing the capacity issues across its plants. A 2nd line in the nutraceuticals business has been commissioned (R100 crore), and expansion at Unit I is expected to be completed by the end of FY18E (R175 crore). We foresee 13%/24% revenue/ earnings CAGR over FY18-20E. With the stock trading at premium multiples (25x/21.7x FY19E/FY20E), we believe that it is fairly valued. Maintain NEUTRAL rating, with a revised TP of Rs 1,100 (22x Dec-19E).
Gross margins were under some pressure (down 300bps y-o-y) due to the product mix and also higher prices of certain raw materials like solvents (linked to crude prices). Apart from this, higher employee costs (certain one-off bonuses given to employees post the Unit II clearance and fresh hiring for upcoming capacity expansions) and R14 crore spent on FDA consultancy fees (non-recurring) also impacted the EBITDA margin in 3QFY18.