4 February 2014
3QFY14 Results Update | Sector:
Healthcare
Divi's Laboratories
BSE SENSEX
20,209
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel.Per (%)
S&P CNX
6,002
DIVI IN
132.7
1,345/905
8/33/21
Financials & Valuation (INR Million)
Y/E MAR
Net Sales
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2014E 2015E 2016E
25,487 31,382 37,898
10,413 12,502 15,326
8,210
61.9
36
226
29.9
38.2
21.4
5.9
9,386 11,577
70.7
14
268
28.7
36.5
18.7
4.9
87.2
23
320
29.7
37.8
15.1
4.1
CMP: INR1,313
TP: INR1,570
Buy
M.Cap. (INR b) / (USD b) 174.3/2.8
Results better than expected:
Divi’s Labs (DIVI) posted better than expected
results for 3QFY14. Revenue grew 29% YoY to INR6.9b (our est: INR6.3b), while
EBITDA grew 58% YoY to INR2.8b (our est: INR2.4b). PAT grew 52% YoY to INR2.2b
(our est: INR1.8b), primarily boosted by stronger-than-expected operational
performance. There was a forex loss of INR53m (included in other expenses).
Capacity utilization at DSN SEZ increases…:
Revenue growth was led by healthy
performance in both CRAMS and API. Capacity utilization at DSN SEZ has increased
and the unit has booked INR1.3b of sales in 3QFY14 (INR3.5b in 9MFY14).
…driving EBITDA margin expansion:
EBITDA margin expanded 760bp YoY to 41.6%
(our est: 38%). The surprise was mainly driven by 320bp YoY reduction in other
expenses. The management attributed this to benefits of operating leverage given
the increased capacity utilization at DSN SEZ. Power cost in 3QFY14 also declined.
FY14/15 guidance:
Based on the strong 9MFY14 performance, DIVI expects FY14
revenue to grow 20% (15-20% guided earlier), with FY15 revenue growing 20-25%
(earlier guidance maintained). Capacity utilization at DSN SEZ would continue to
ramp up, aided by FDA approval of the remaining three blocks (inspection
expected in 4QFY14). DIVI has indicated that the current high EBITDA margins are
not sustainable and has guided 40% for FY15. The power shortage issue has been
resolved and will aid margin expansion over the next couple of quarters. The capex
guidance stands at INR700m-750m (apart from INR800m addition from CWIP) and
tax rate guidance is marginally lowered to 22-23%.
Revising estimates; maintain Buy:
Based on 3QFY14 results, we have raised our
FY14/FY15/FY16 EPS estimates by 5%/6%/2% to reflect higher margins on account
of operating leverage benefit and lower tax rate. We estimate 21% revenue CAGR,
and 24% EBITDA and EPS CAGR over FY13-16, with EBITDA margin at 39-41%. The
stock trades at 18.7x FY15E and 15.1x FY16E earnings. We re-iterate
Buy
with a
revised target price of INR1,570 (18x FY16E EPS). DIVI remains one of our top picks
in the midcap pharma space.
Alok Dalal(Alok.Dalal@MotilalOswal.com);+91
22 3982 5584
Hardick Bora(Hardick.Bora@MotilalOswal.com);+91
22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.

Divi's Laboratories
3QFY14 EBITDA was above estimates
For 3QFY14, Divi's Labs reported a 29% YoY growth in revenues to INR6.9b (v/s est.
of INR6.3b), 58% YoY growth in EBITDA to INR2.8b (v/s est. of INR2.4b) and 52% YoY
growth in PAT to INR2.2b (v/s est. of INR1.8b).
The custom synthesis segment contributed 47% of sales and grew 29% YoY (v/s est.
18%). The API segment contributed ~48% of sales and grew 25% YoY (v/s est. 17%).
Carotenoids sales stood at ~INR330m (v/s est. 240m), up 78% YoY.
EBITDA margins expanded 760bp YoY to 41.6%, above our estimated 38 %. Gross
margins improved 420bp YoY (as expected) due by better product mix compared to
a low base. Improvement of 320bp YoY in other expenses came as a positive
surprise. The management attributed this to operating leverage benefit.
There was a forex loss of INR53m for the quarter included in other expense
(compared to gain of INR160m in other income in 3QFY13).
Quarterly revenue trend (INR m)
Quarterly revenue Mix (INR m)
Source: MOSL, Company
Source: MOSL, Company
Quarterly EBITDA Trend (INR m)
Source: MOSL, Company
4 February 2014
2

Divi's Laboratories
Key takeaways from our discussion with the management
Sales growth for the quarter was 29% YoY led by strong performance from the
CCS and the generics business along with a favourable currency. The
management re-iterated that the underlying traction in the business remains
strong and has thereby increased its revenue guidance to 20% growth in FY14E
from 15-20% earlier.
Revenue guidance from Carotenoids stands at INR1.5b for FY14E (9M sales for
carotenoids was INR940m). The remaining 3 blocks at the DSN SEZ are expected
to start commercialization in 1HFY15E and reach peak capacity utilization
towards end of FY15E. The company believes it has the potential to grow its
sales over 20-25% in FY15 as new capacities come on stream.
The power situation in the state continues to remain normal. Power shortage in
the state of was restored from August 2013 and Divi’s has witnessed a savings of
INR 30m from power costs sequentially (reflected in other expenditure for 3Q
FY14). Power cost for 3Q was INR340m versus INR400m during the power crisis
period
Cash capex will be INR700-750m for FY15E with another ~INR800m addition to
gross block from CWIP. Tax rate guidance marginally lowered to 22-23%.
FY15 Guidance
Parameter
Sales growth (%)
Guidance
20-25%
EBITDA Margins
(%)
Tax rate (%)
Capex (INR m)
Sustainable at
40%
22%
700-750
Remarks
Increased from 20% earlier. Divi’s
expects remaining blocks of DSN SEZ to
get commercialized in 1HFY15E.
Our estimates factor-in EBITDA Margins
of ~39.8%.
Lower than earlier guidance of 23-24%
Apart from this, ~INR800m in CWIP will
be added to fixed assets.
Source: Company, MOSL
Long term growth drivers in place
Growth drivers in place for API business:
While revenue contribution from top
products (Naproxen and Dextromethorphan) in the API division continues to be
robust, future growth is expected to be driven by new as well as recently
introduced products. The company has ~20-25 products under development.
No deterrents in CSM division:
The custom Synthesis/Manufacturing (CSM)
business is not expected to see any growth challenges from the drying innovator
pipeline. The management has indicated that customer order-flow continues to
remain robust.
Commercialization of DSN blocks to support EBITDA margins:
Divi’s Labs spent
~INR5b on capacity expansion (including the DSN SEZ unit). So far, two out of
five blocks at the DSN SEZ unit have been approved by the USFDA and
commercialized, while another three are expecting approval in
end
4QFY14E.
Divi’s has already started using the remaining 3 blocks for intermediate supplies
to emerging markets. We believe that the commercialization of these units will
not only drive sales growth, but also provide the benefits of operating leverage
to the EBITDA margins.
3
4 February 2014

Divi's Laboratories
EBITDA margins to improve going forward
DIVI’s operating margins in FY13 was 37.9% impacted by (1) rising power cost in
Andhra Pradesh and (2) adverse sales mix in 3QFY13.
Both these issues seem to have normalized and savings from power cost are
visible in performance over the last two quarters. For
3QFY14
itself, the
company has reported power cost of ~INR340m compared to INR 370m in
2QFY14 and INR400m in 1QFY14 .
Increased capacity utilization at new SEZ unit, post the US FDA inspection will
also provide benefits of operating leverage and aid improvement in profitability.
For FY15E, the management has guided for EBITDA margin level of 40% as
operating leverage will start to play out.
We have taken these factors into consideration and expect 260bps
improvement in EBITDA margin over FY13-16E.
EBITDA trend
Revenue mix (INR m)
Source: MOSL, Company
Source: MOSL, Company
RoE (%) & RoCE (%)
Source: MOSL, Company
4 February 2014
4

Divi's Laboratories
Valuation and view
Divi’s is well positioned in the CRAMS space, given its strong relationships with
innovators, presence across the CRAMS value chain, and its ability to support
the innovator in late life-cycle strategies.
Unlike other generic API players, Divi’s earns strong margins due to its global
cost and market leadership in some APIs (global market share of 50-70%),
pricing power and strong backward integration.
We expect Divi’s to be a key beneficiary of the increased pharmaceutical
outsourcing from India, given its strong relationships with global innovator
pharmaceutical companies. It has undertaken a large capex at its new SEZ,
implying positive prospects for outsourcing business.
Based on 3QFY14 results, we have raised our FY14E/FY15E/FY16E EPS estimates
by 5%/6%/2% to reflect higher margins on account of operating leverage benefit
and lower tax rate.
We estimate 21% revenue CAGR, 24% EBITDA & EPS CAGR over FY13-16E with
EBITDA margins between 39%-41%. RoCE would be between 36-38% and RoE
between 28-30% over FY14-16, led by traction in high-margin CRAMS business,
sustained profitability in Generics business and increased contribution from the
new SEZ.
The stock trades at 18.7x FY15E and 15.1x FY16E earnings. We re-iterate Buy
with a revised TP of INR1,570 (18x FY16E EPS). Divi’s Labs continues to be one of
our top picks in the mid cap pharma space.
4 February 2014
5

Divi's Laboratories
Divi's Laboratories: an investment profile
Company description
Divi's Labs is one of the leading players in the CRAMS
segment and has one of the strongest CCS pipeline. The
company enjoys good relationships with innovator
pharmaceutical companies.
Since the agreements between Divi's and its MNC
customers are confidential, there is no visibility on
the potential of the CCS business.
Recent developments
Nil
Key investment arguments
We expect Divi's to be one of the key beneficiaries
of increased pharmaceutical outsourcing from India.
Strong chemistry skills for early-phase work coupled
with a strong pipeline of late-stage and
commercialized products are likely to augur well for
the company's CRAMS business.
Neutraceuticals business could become big
opportunity with limited competition. However,
ramp-up in this business will be gradual until new
customers are added.
Valuation and view
We expect Divi's to be a key beneficiary of the
increased pharmaceutical outsourcing from India
given its strong relationships with global innovator
pharmaceutical companies.
Valuations at 18.7x FY15E and 18.7x FY16E earnings.
We maintain
Buy
with TP of INR1,570 (18x FY16E
EPS).
Sector view
Key investment risks
The CCS business' success is linked to the fortunes
of its MNC customers, especially their drug
discovery pipeline.
Global M&As may lead to rationalization of R&D
pipelines which could potentially reduce the
number of R&D projects under development
thereby affecting CRAMS companies business.
India is on the threshold of a significant opportunity
in the contract manufacturing space. We expect
increased outsourcing from India as it offers a
unique proposition of low costs coupled with
chemistry and regulatory skills.
High entry barriers will ensure that the top 6-7
players will command a disproportionate share of
this opportunity.
Comparative valuations
P/E (x)
P/BV(x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
Divis Labs
21.4
18.7
5.9
4.9
6.9
5.6
16.8
14.0
Dishman
4.9
4.1
0.5
0.5
0.9
0.7
4.1
3.3
Jubilant
5.2
4.6
0.9
0.8
1.0
0.8
4.7
3.9
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
61.9
70.7
Consensus
Forecast
56.4
66.7
Variation
(%)
9.8
6.1
Target price and recommendation
Current
Price (INR)
1,313
Target
Price (INR)
1,570
Upside
(%)
19.6
Reco.
Buy
Shareholding pattern (%)
Dec-13
Promoter
Domestic Inst
Foreign
Others
52.1
13.2
17.0
17.8
Sep-13
52.1
12.5
16.6
18.8
Dec-12
52.2
13.7
14.3
19.9
Stock performance (1-year)
4 February 2014
6

Divi's Laboratories
Financials and valuation
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
Margins (%)
2013
21,399
15
8,102
37.9
769
7,333
18
497
0
7,812
1,792
22.9
0
6,020
6,020
13
28
(INR Million)
2014E
25,487
19
10,413
40.9
917
9,496
15
1,121
0
10,602
2,392
22.6
0
8,210
8,210
36
32
2015E
31,382
23
12,502
39.8
1,071
11,431
27
629
0
12,033
2,647
22.0
0
9,386
9,386
14
30
2016E
37,898
21
15,326
40.4
1,146
14,181
27
689
0
14,843
3,265
22.0
0
11,577
11,577
23
31
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
2013
45.4
51.2
188.4
15.0
38.7
2014E
61.9
68.8
225.5
21.1
40.0
2015E
70.7
78.8
267.9
24.2
40.0
2016E
87.2
95.9
320.3
29.8
40.0
29.1
25.8
7.0
8.2
21.6
1.1
21.4
19.2
5.9
6.9
16.8
1.6
18.7
16.8
4.9
5.6
14.0
1.8
15.2
13.8
4.1
4.6
11.3
2.3
26.0
33.1
29.9
38.2
28.7
36.5
29.7
37.8
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2013
265
24,740
25,006
331
792
26,129
13,383
4,296
9,087
3,034
4,078
15,188
8,357
5,120
409
1,302
5,259
2,901
2,358
9,929
26,129
(INR Million)
2014E
265
29,667
29,932
331
792
31,055
16,568
5,213
11,355
750
6,478
19,564
10,195
6,372
958
2,039
7,091
3,568
3,523
12,472
31,055
2015E
2016E
265
265
35,298 42,244
35,563 42,510
331
331
792
792
36,686 43,633
17,318 18,068
6,284
7,430
11,034 10,638
750
750
9,478 12,478
24,151 30,409
12,553 15,159
7,845
9,475
1,242
2,743
2,511
3,032
8,726 10,642
4,707
5,685
4,019
4,958
15,424 19,767
36,686 43,633
E: MOSL Estimates
0.9
0.9
0.9
0.9
Cash flow statement
Y/E March
OP/(Loss) before Tax
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2013
8,102
497
-1,792
-1,263
5,544
-3,504
692
0
-2,811
0
-286
-18
-2,329
-2,633
99
309
409
(INR Million)
2014E
10,413
1,121
-2,392
-1,994
7,148
-900
-2,400
0
-3,300
0
0
-15
-3,284
-3,299
549
409
958
2015E
12,502
629
-2,647
-2,668
7,815
-750
-3,000
0
-3,750
0
0
-27
-3,754
-3,781
284
958
1,242
2016E
15,326
689
-3,265
-2,841
9,909
-750
-3,000
0
-3,750
0
0
-27
-4,631
-4,658
1,501
1,242
2,743
4 February 2014
7

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Divi's Laboratories
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DIVI'S LABORATORIES LTD
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4 February 2014
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8