11 August 2014
1QFY15Results Update | Sector:
Healthcare
Divi's Laboratories
BSE SENSEX
25,519
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel.Per (%)
S&P CNX
7,626
DIVI IN
132.7
1,549/920
1/-14/20
CMP: INR1,512
TP: INR1,575
Buy
M.Cap. (INR b) / (USD b) 200.7/3.3
Financials & Valuation (INR Million)
Y/E MAR
Net Sales
EBITDA
Adj PAT
Adj.EPSINR)
Gr.(%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2015E 2016E 2017E
29,492 35,472 42,613
11,840 14,224 17,002
8,570 10,395 12,495
64.6
11
259
26.8
34.2
23.4
5.8
78.3
21
298
28.1
35.9
19.3
5.1
94.1
20
345
29.3
37.4
16.1
4.4
Divi’s Labs 1QFY15 results were above estimates. Revenues grew 24% YoY to
INR6.4b (7% beat), while EBITDA grew 19% YoY to INR2.3b (9% beat). PAT
declined 4% YoY to INR1.7b (6% beat). There was a forex gain of INR10m included
in other income compared to INR430m in 1QFY14, resulting in a YoY decline in
PAT. Adj for the forex gains, PAT growth is 24%.
Growth was led by healthy performance in both CRAMS as well as API business.
All the five blocks at the DSN SEZ have been inspected by the US FDA and the
capacity utilization has increased to 75%. Divi’s is seeing a sequential
improvement in volume growth over the last few quarters.
EBITDA margin contracted 170bp YoY to 36.3%, but was higher than our est.
35.7%. The revenue mix continued to be skewed towards low-margin API
business. This led to 450bp YoY decline in gross margins. However, lower
employee costs and other expenses as % of sales brought in benefits of operating
leverage.
FY15 guidance:
The management has maintained the FY15E revenue growth
guidance at 20% (on constant currency basis) and EBITDA margin guidance at
40%. Revenue would grow as capacity utilization at DSN SEZ is expected to
increase from current 75% to 80-85% by end of the year. The capex guidance
stands at INR700-800m (apart from INR1940m addition from CWIP), while tax
rate guidance is maintained at 22%.
Post the 1QFY15 results, we have largely retained our earnings estimates for FY15-
FY17. Divi’s has a robust business model with significant barriers to entry. While this
model is likely to have q-q lumpiness, the longer term outlook is very encouraging.
Though current valuations have limited upside to our target price, we believe Divi’s
estimate may surprise positively over the next two quarters as it is likely to be a key
player in the generic supply of Diovan in US. We re-iterate Buy with a revised TP of
INR1,575 (20x FY16E EPS).
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
Key takeaways from our discussion with the management
Sales growth for the quarter was 24% YoY led by stronger growth in both CRAMs
as well as APIs.
The CRAMS business contributed ~47% of sales and grew 24% YoY (v/s est.
16%), while APIs contributed ~53% of sales and grew 23% YoY (v/s est. 16%).
The management re-iterated that the underlying traction in the business
remains strong and has maintained its revenue guidance of 20%+ growth in
FY15E.
EBITDA margin contraction during the quarter was due to adverse sales mix. The
management expects this to normalize going forward and has thus maintained
EBITDA margin guidance of 40% for FY15E.
Power costs were higher during the quarter due to increasing prices. However
the impact on margins is expected to be insignificant.
The management indicated that remaining two blocks at DSN SEZ have also
been inspected by the US FDA. The facility is operating at 75% of its capacity.
The same is expected to reach 80-85% utilization by FY15E end and peak
utilization by FY16E end.
Divi’s Labs was already in the market with Valsartan (Diovan) API. However, the
management did not confirm if they are the API source for Ranbaxy’s exclusive
copy in the US.
Cash capex will be INR700-800m for FY15E with another ~INR1490m addition to
gross block from CWIP. Tax rate guidance is maintained at 22%.
FY15 guidance
Parameter
Sales growth (%)
EBITDA Margins (%)
Tax rate (%)
Capex (INR m)
Guidance
20%+
Sustainable at 40%
22%
700-800
Remarks
We have factored in 18% growth assuming an appreciating INR in
FY15
Our estimates too factor-in EBITDA margins of ~40%.
Maintained at 22%
Apart from this, INR1940m in CWIP will be added to fixed assets
in FY15E.
11 August 2014
2

Divi's Laboratories
Sequential improvement in volume growth
Sales (INR m)
YoY Growth (%)
Both CRAMS and APIs grew faster than expected
CRAMS
Generics
Neutraceuticals
29
20
10
5,159 5,659 6,874
1Q
2Q
FY14
3Q
4Q
7,380
14
24
15
14
19
6,398 6,508 7,836 8,751
1Q
2QE
3QE
4QE
330
450
330
4,084
280
3,313 3,786 3,011 2,934 3,653
2,403 2,613
2,476 2,716 3,231 3,446 3,007 3,124 3,683 4,083
1Q
2Q
FY14
3Q
4Q
1Q
2QE
3QE
4QE
330
380
500
584
FY15
FY15
Source: Company, MOSL
Source: Company, MOSL
Adverse sales mix continues to impact gross margin
Gross Profit (INR m)
Gross Margin (%)
Operating leverage benefits restrict further margin decline
EBITDA (INR m)
EBITDA Margin (%)
65.6
68.2
62.7
58.8
61.1
66.0
65.2
63.0
38.0
43.8
41.6
35.1
36.3
41.0
43.4
39.4
3,384 3,857 4,312 4,338 3,908 4,295 5,109 5,513
1Q
2Q
FY14
3Q
4Q
1Q
2QE
3QE
4QE
1,959 2,477 2,859 2,592 2,323 2,668 3,401 3,448
1Q
2Q
FY14
3Q
4Q
1Q
2QE
3QE
4QE
FY15
FY15
Source: Company, MOSL
Source: Company, MOSL
Decline in PAT due to lower forex gain
PAT (INR m)
YoY Growth (%)
Key takeaways
30
74
52
4
6
2,486
14
1,679 1,930
-4
1Q
-6
2QE
3QE
2,507
4QE
1,747 2,049 2,190 1,931
1Q
2Q
FY14
3Q
4Q
FY15
Source: Company, MOSL
Revenue growth was 7% higher than our estimate.
Moreover, the mix continued to be skewed towards
low-margin APIs business. This led to 450bp YoY
decline in gross margins.
However, lower employee costs and other expenses
as % of sales brought in benefits of operating
leverage.
PAT declined YoY due to lower other income (as
expected). There was a forex gain of INR10m in
other income, lower than INR430m in 1QFY14. Adj
for this, PAT growth is 24%.
11 August 2014
3

Divi's Laboratories
Trend in revenue mix (INR m)
Neutraceuticals
CRAMS
Generics
EBITDA trend and margins
2,900
2,378
20,011
16,676
37.6
36.9
37.9
43.0
EBITDA (INR m)
Margin (%)
910
6,100
4,454
4,604
FY10
6,350
FY11
10,272
1,270
11,869
1,914
13,897
39.9
40.1
40.1
39.9
8,921
16,418 19,702
12,114 13,682
8,855 10,218
FY12
FY13
FY14
FY15E FY16E FY17E
4,053
FY10
4,915
FY11
6,850
FY12
8,102 10,077 11,840 14,224 17,002
FY13
FY14
FY15E FY16E FY17E
Source: Company, MOSL
Source: Company, MOSL
Above-industry return ratios
RoCE (%)
RoE (%)
Free cash flow (INR m) to increase
37.4
Cash flow impacted
due to customer
inventory de-
stocking & large
34.1
28.2
36.0
33.1
34.2
35.9
9,647
7,791
4,215
8,493
24.7
3,576
27.1
25.9
FY11
FY12
28.3
26.0
FY13
FY14
26.8
28.1
29.3
2,472
1,290
2,041
27.3
FY10
FY15E FY16E FY17E
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Source: Company, MOSL
Source: Company, MOSL
Increasing dividend payout trend
Dividend (INR m)
Dividend Payout (%)
Earnings momentum to sustain
EPS (INR)
36%
27%
38%
39%
40%
45%
50%
50%
78.3
40.2
45.4
58.3
64.6
94.1
925
FY10
1,549
FY11
2,006
FY12
2,329
FY13
3,106
3,856
5,197
6,247
25.8
32.4
FY14
FY15E FY16E FY17E
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Source: Company, MOSL
Source: Company, MOSL
11 August 2014
4

Divi's Laboratories
Valuation and view
Post the 1QFY15 results, we have largely retained our earnings estimates for
FY15-FY17.
Divi’s has a robust business model with significant barriers to entry. While this
model is likely to have q-q lumpiness, the longer term outlook is very
encouraging.
Though current valuations have limited upside to our target price, we believe
Divi’s estimate may surprise positively over the next two quarters as it is likely to
be a key player in the generic supply of Diovan in US.
We re-iterate
Buy
with a revised TP of INR1,575 (20x FY16E EPS).
11 August 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
Key investment arguments
Remaining two blocks at DSN SEZ inspected by the
US FDA.
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
Valuations at 23.4x FY15E and 19.3x FY16E
earnings.
Though current valuations have limited upside to
our target price, we believe Divi’s estimate may
surprise positively over the next two quarters as it
is likely to be a key player in the generic supply of
Diovan in US.
We re-iterate
Buy
with a revised TP of INR1,575
(20x FY16E EPS).
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.
Sector view
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.
Target price and recommendation
Current
Price (INR)
1,512
Target
Price (INR)
1,575
Upside
(%)
4.2
Reco.
Buy
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY15
FY16
64.6
78.3
Consensus
Forecast
68.5
82.6
Variation
(%)
-5.7
-5.2
Shareholding pattern (%)
Jun-14
Promoter
DII
FII
Others
52.1
11.8
19.0
17.2
Mar-14
52.1
12.1
18.2
17.6
Jun-13
52.2
12.5
14.9
20.5
Stock performance (1-year)
Note: FII Includes depository receipts
11 August 2014
6

Divi's Laboratories
Financials and valuations
Income statement
Y/E Mar
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 (%)
2014
25,253
18
10,077
39.9
921
9,156
21
774
0
9,909
2,176
22.0
0
7,733
7,733
28
31
2015E
29,492
17
11,840
40.1
1,443
10,397
14
603
0
10,985
2,416
22.0
0
8,570
8,570
11
29
(INR Million)
2016E
35,472
20
14,224
40.1
1,528
12,696
14
645
0
13,326
2,932
22.0
0
10,395
10,395
21
29
2017E
42,613
20
17,002
39.9
1,618
15,384
14
649
0
16,019
3,524
22.0
0
12,495
12,495
20
29
Ratios
Y/E Mar
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)
2014
58.3
65.2
223.3
20.0
40.2
2015E
64.6
75.4
258.8
24.8
45.0
2016E
78.3
89.8
297.9
33.5
50.0
2017E
94.1
106.3
345.0
40.2
50.0
26.0
23.2
6.8
7.9
19.9
1.3
23.4
20.0
5.8
6.8
16.9
1.6
19.3
16.8
5.1
5.6
14.0
2.2
16.1
14.2
4.4
4.7
11.7
2.7
28.3
36.0
26.8
34.2
28.1
35.9
29.3
37.4
Balance sheet
Y/E Mar
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
2014
265
29,368
29,633
179
1,150
30,962
17,403
5,185
12,218
1,445
5,019
18,423
9,324
7,237
405
1,457
6,143
2,995
3,148
12,280
30,962
2015E
265
34,081
34,347
179
1,150
35,676
20,093
6,628
13,466
5
8,019
21,823
10,912
7,963
1,326
1,622
7,637
3,539
4,098
14,186
35,676
(INR Million)
2016E
2017E
265
265
39,279 45,526
39,544 45,791
179
179
1,150
1,150
40,873 47,120
21,598 23,103
8,156
9,774
13,442 13,329
5
5
11,019 14,019
26,154 31,481
13,125 15,767
9,577 11,505
1,608
1,993
1,845
2,216
9,747 11,713
4,257
5,114
5,491
6,600
16,407 19,768
40,873 47,120
E: MOSL Estimates
0.9
0.9
0.9
1.0
Cash flow statement
Y/E Mar
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
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
2014
10,077
774
-2,176
-2,355
6,320
-2,105
-941
-3,046
0
-152
-21
-3,106
-3,278
-4
409
405
2015E
11,840
603
-2,416
-985
9,041
-1,250
-3,000
-4,250
0
0
-14
-3,856
-3,870
921
405
1,326
(INR Million)
2016E
14,224
645
-2,932
-1,939
9,998
-1,505
-3,000
-4,505
0
0
-14
-5,197
-5,212
281
1,326
1,608
2017E
17,002
649
-3,524
-2,975
11,152
-1,505
-3,000
-4,505
0
0
-14
-6,247
-6,262
385
1,608
1,993
11 August 2014
7

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