Hopes keep Divi's Labs stock elevated

Street hopes for quick resolution, even as import alert impacts biz

The performance of Divi’s Laboratories in the September quarter (Q2) was hit by import alerts issued by the US FDA (US drug regulator). All its key parameters declined for a third consecutive quarter. Its revenue was down 11 per cent, operating and net profit fell five per cent and eight per cent, respectively, during the period. Profitability, too, was below expectation.

Revenue at Rs 890 crore met the Bloomberg consensus expectation of Rs 883 crore but remediation efforts towards FDA issues took a toll on profitability. The delay in shipments due to additional protocols and procedures for exempted products also impacted its performance, analysts said. 

Its earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 277 crore was lower than the Rs 287 crore estimated by analysts. Adjusted for the one-off staff bonus of Rs 79 crore in the year-ago period, the decline in Ebitda would have been sharper, they said. Net profit at Rs 207 crore was 7.6 per cent lower than Rs 224 crore estimated. 

The results were announced after trading hours on Tuesday. So, what propped the  stock price? The scrip was up 4.4 per cent at Rs 920.30 on Wednesday. The reasons being — the latest news that the US FDA would recognise eight European Union (EU) regulators as qualified of conducting inspections of facilities (thereby avoiding duplication and faster resolution for companies), rubbed-off well. 

Second, the Street hopes for a faster resolution of an import alert pertaining to Divi’s Unit II at Vishakhapatnam. This plant has been under the FDA scanner since December 2016. Divi’s is attempting quick resolution.

Re-inspection by the FDA for Unit II in September had resulted in milder (six) observations. Divi’s said the inspections were regarding the current good manufacturing practices. All the previous observations have been confirmed as completed and resolved, and the company has responded to the fresh observations. Analysts at Axis Capital had last month said they were surprised by the company’s fast remediation, followed by quick FDA re-inspection.

The Street’s expectations also stem from Divi’s Unit II going through without any critical observations after it was inspected by Irish and Slovenian drug regulators in the September quarter. 

Axis Capital, which expected the earnings to improve from the end of FY18/FY19, has increased its FY19 earnings by 15 per cent and target price to Rs 1,080.

But, words of caution follow. Analysts at Edelweiss said the stock had rallied 33 per cent in three months, building in all upsides from resolution, while not factoring in delays in resolution that usually takes more than two years. 

The management has guided for quarterly revenue run-rate similar to Q2FY18 in the second half of FY18 as well, analysts said.