>DIVI's LAB: Vizag SEZ, Carotenoids uptick to boost revenues

Sustained revenue ramp-up in sight; Buy

■ Recent underperformance offers a particularly good entry point; Buy
We believe Divis 14% YTD underperformance (vs market) is overdone noting high revenue visibility (22%+), healthy Balance Sheet and strong earnings trajectory (24% EPS CAGR). Our recent interaction with management reinforces our optimistic view on Divis’ ability to capitalize on CRAMS recovery backed by strong customer relationships (~70% sales from repeat business) & capex plan. Rate Divis as our top mid-cap pharma pick and reiterate Buy with PO of Rs940.


■ Vizag SEZ, Carotenoids uptick to boost revenues
We expect Divis to sustain 22% sales CAGR over FY12-14E driven by (a) increased volumes in key API products (~35% of sales, 60%+ mkt share) & new launches from upcoming US patent expirations (like generic Seroquel-Mar’12, Diovan-Sep’12) to help 20%+ growth; (b) New orderflow in high margin custom synthesis business to sustain 25%+ growth & (c) Carotenoids business set to double sales to Rs1.6bn by FY14E. New Vizag SEZ would support company’s growth plan with 25% incremental capacity being added (peak sales of Rs5bn).


■ Carotenoids – opportunity to unfold strongly
We expect Divis carotenoid business to grow at fast pace over FY12-14E to clock revenues of Rs1.6bn (from Rs840mn in FY12E). New customer additions through distributor (like Omya Intl) would help capture mkt share of ~5% in US$1bn global mkt over 3-5 years. With only two large players DSM & BASF in the market, customized solutions would help Divis differentiate and gain market share.


■ Attractive valuations; PO implies 27% upside potential
Divis is currently trading at 15.8x FY13E & 13.4x our FY14E, at 15% discount to its historic average and in line with the sector despite stronger return ratios (~25%) & superior margin profile (37% EBITDA margin vs 20% avg). We expect 4Q PAT to improve 17% QoQ led by 22% sales growth, implying sustained improvement in revenue run-rate and key to re-rating potential. Reiterate Buy.


To read full report: DIVI's LAB
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