Numbers soft, Edelweiss puts Divi’s Labs rating at Reduce with Rs 545 TP

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Published: November 2, 2017 4:48:35 AM

Divi's Laboratories’ Q2FY18 numbers were soft with revenue, EBITDA and PAT declining 11 %, 5 % and 33 % y-o-y, respectively. Adjusted for one-off staff bonus of Rs 791 million last year, EBITDA fell 25 %.

Numbers soft, Edelweiss, Divi Labs rating, Divi Laboratories, EBITDA and PAT declineDivi?s Laboratories’ Q2FY18 numbers were soft with revenue, EBITDA and PAT declining 11 %, 5 % and 33 % y-o-y, respectively. Adjusted for one-off staff bonus of Rs 791 million last year, EBITDA fell 25 %. (Image: Reuters)

Divi’s Laboratories’ Q2FY18 numbers were soft with revenue, EBITDA and PAT declining 11 %, 5 % and 33 % y-o-y, respectively. Adjusted for one-off staff bonus of Rs 791 million last year, EBITDA fell 25 %. Delay in shipments due to additional protocols and procedures for exempted products and cost escalation due to remedial measures at Unit-II hit revenue and profitability. Management has guided for quarterly revenue run-rate similar to Q2FY18 in H2FY18 as well. Divi’s has filed its response to 6 fresh observations issued after the recent inspection and awaits further communication from USFDA. Till then, the import alert will remain. The stock has rallied 33% in past 3 months building in all upsides from resolution, while not factoring in delays in resolution which usually takes more than 2 years. Maintain ‘Reduce’ with TP of Rs 545.

Revenue/EBITDA/PAT fell 11% /5 %/33 % y-o-y versus our expectations of 10 % decline in top line and 24 % dip in bottom line. This quarter, the USFDA inspected the company’s unit-II at Vishakhapatnam for full GMP and verification of corrective measures against previous observations. Divi’s awaits USFDA communication for its response to 6 new observations issued after the FDA inspection. Till such time, the import alert will remain in place. Additionally, management guided for: (1) Similar quarterly revenue run-rate as Q2FY18 in H2FY18 too; (2) EBITDA margin at 31-32 % versus earlier 33-34 %; and (3) Remedial cost: 100-150 bps impact on margins.

The language for 6 fresh observations issued in September was not as harsh as the previous 5 observations. Issues like cleaning, contamination, retesting of samples and lack of proper investigation remain. Additionally, FDA’s scrutiny could extend to Unit-I, as was the case with other Indian companies facing import alerts. We believe the stock does not factor in these risks and resulting delays in resolution of the import alert, which generally takes more than 2 years. Management has guided for similar quarterly revenue run-rate as Q2FY18, going forward in H2FY18. They also revised down EBITDA margin to 31-32 % as against earlier guidance of 33-34 %. Further, they guided for 100-150bps impact on margins on account of remedial measures.

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