Scripscan:DIVI'S LAB
cmp:500
Traded in:Nse-bse
Story:Divi’s Q1FY09 result disappointed at all fronts. Revenue was down by 22% (down 36% QoQ) to Rs2.06bn (est. of 14% growth), operating margins contracted by 840bps YoY and 540bps QoQ to 32.4% and APAT was down by 38% (down 46% QoQ) to Rs583mn (est. of Rs1.1bn). Inventory rationalization at customer end and poor off-take of Custom Chemical Synthesis (CCS) continued to impact Divi’s performance. We believe that company will continue to witness pressure on its business at least for one more quarter because of challenging global environment and expect some improvement from 2HFY10E onwards. We lower our FY10/11E earning estimates by 21% to Rs30.1 and Rs36.4 respectively. We expect RoCE and RoE to comedown from 37% & 38% to 26% level by FY11E. In the past, Divi’s used to trade at a premium because of higher profitability and superior return profile. Amidst contraction in margins and return profile with lower revenue growth (CAGR of 7.7% over FY09-11E), we expect this premium to shrink. We value the company at 20% premium to CRAMS multiple because of strong balance sheet (historically it traded at a premium of 35%) and lower our TP to Rs465 (14x Sep 10E EPS).We downgrade our rating from Hold to Sell. At CMP of Rs500, it is trading at 14.xFY11E (50% premium to CRAMS).
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