Divi's Labs seeks elusive US trigger to fire self

The Divi's Laboratories stock rose three per cent on Monday on the back of better-than-expected profits in the June quarter and hopes that prospects would improve from the second half of FY14. The Ebitda margins for the quarter at 38 per cent, though down 130 basis points year-on-year, were above analyst expectations on the back of better gross margins due to a superior product mix and lower employee and other expenses. Analysts say Ebitda margins are likely to improve on lower power costs and rising capacity utilisation. In fact, it was the deteriorating situation on these two, with possible delays in inspection and commercialisation of the DSN unit at Vizag responsible for the stock losing 16 per cent since May. With power costs improving, the key trigger for the stock continues to be the US Food and Drug Administration (FDA) approval of the unit. Given its commercialisation in the last quarter of FY14, gains largely will be in FY15, says HSBC's Girish Bakhru.

The company will also gain from rupee fall (gains evident in the quarter) and improving margins as power costs taper. Vivek Kumar and Kunal Mishra of SBICAP Research say the company is likely to sustain an operating profit margins of 40 per cent. Margins in the March quarter and FY13 were 37-38 per cent.

The company that gets 90 per cent of its revenues from exports is expected to make currency gains of 6.5 per cent for FY14, say analysts at IndiaNivesh Research.

However, given no major triggers in the short term and with the commissioning of the unit a few quarters away (Q4FY14), only investors with a holding period beyond a year should consider the stock. At Rs 964, the stock is trading at 19 times its FY14 estimates, with analysts pegging its price targets in the range of Rs 1,100- 1,300.

Sales growth revives
Net sales at Rs 516 crore recorded a growth of 10.1 per cent year-on-year, below expectations, driven by volume growth and on a high base of the year-ago quarter. The topline growth has come back to positive territory after a contraction in the March quarter. The management expects growth for the year to be in line with the 15 per cent number in FY13. What would improve it is the FDA nod for the remaining blocks of its DSN special economic zone in the second half of FY14. Praful Bohra of Nirmal Bang expects the unit to add 50 per cent to capacity.

At seven per cent of sales, power and fuel costs were up 300 basis points compared to the March 2013 quarter. With power shortage easing from August, it is likely to save on this front. Power costs increased 58 per cent at Rs 136 crore in FY13 due to increase in tariffs, purchase from private producers and higher fuel prices.

For FY13, the company had posted a growth of 13 per cent in consolidated net profit at Rs 602 crore. Although standalone net profit (accounts for most of consolidated numbers) is up just 4.4 per cent at Rs 175 crore in June quarter, with improving profitability and sales likely to grow between 10-15 per cent, profit growth should also improve in the coming quarters.