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The Divis Laboratories stock rose 3% on Monday on the back of better than expected profitability in the June 2013 quarter and hopes that prospects will improve from the second half of FY14.
The company’s Ebidta margins for the quarter at 38% though down 130 basis points year-on-year were above analyst expectations on the back of better gross margins brought on by a superior product mix as well as lower employee and other expenses.
Analysts believe that Ebidta margins are likely to improve going ahead on lower power costs and rising capacity utilisation. In fact, it was the deteriorating situation on these two factors coupled with possible delays in inspection and commercialisation of the company’s DSN unit at Vizag that was responsible for the stock losing 16% since May.
With power costs improving, the key trigger for the stock continues to be the US FDA approval of the company’s DSN unit in Vizag. Given commercialisation of the facility in the last quarter of FY14, gains largely will flow into the company in FY15, feels HSBC’s Girish Bakhru.
Going ahead, the company will also gain from rupee depreciation (forex gains evident on financials in June quarter) and improving margins as power costs taper down. Vivek Kumar and Kunal Mishra of SBI CAP Research say that the company is likely to sustain operating profit margins of about 40%. Margins in the March quarter and FY13 were in 37-38% range.
On the rupee depreciation front, the company which gets 90% of its revenues from exports is expected to make currency gains to the tune of 6.5% for FY14, believe analysts at IndiaNivesh Research.
However, given no major triggers in the short term and with the commissioning of the Vizag plant a couple of quarters away (Q4'FY14), 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 and Rs 1,100-Rs 1,300.
Sales growth revives, margins to look up
Divis' net sales at Rs 516 crore recorded a growth of 10.1% year-on-year, which was below expectations driven mainly 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 fiscal to be in line with the 15% number achieved in FY13. What would improve it further is the FDA approval for the remaining blocks of its DSN special economic zone in the second half of FY14. Praful Bohra of Nirmal Bang expects the DSN unit to add more than 50% to existing capacity and hence the US FDA nod is an important trigger for the stock.
While these gains will largely flow only in the next fiscal for the topline what is likely to come as a relief on the expenditure side from hereon is the easing power cost. At 7% of sales (they ranged between 4.6-6.4% over the last two fiscals), power and fuel costs were up 300 basis points compared to the March 2013 quarter.
With power shortage situation easing from August 1, the company drawing power from the government grid, it is likely to save on this front. Power costs increased 58% at Rs 136 crore in FY13 on account increase in tariffs, purchase from private producers and higher fuel prices.
For FY13, the company had posted a growth of 13% in consolidated net profit at Rs 602 crore. Although standalone net profit (accounts for most of consolidated numbers) is up just 4.4% at Rs 175 crore in June quarter, with improving profitability and sales likely to grow between 10-15%, profit growth should also improve in the coming quarters.
