Investor's Eye: Update - Divi's Laboratories, Zydus Wellness

 

Investor's Eye [May 21, 2013]  Sharekhan www.sharekhan.com     If you do not wish to receive this research report in future, please click here

Summary of Contents   STOCK UPDATE Divi's Laboratories Recommendation: Buy Price target: Rs1,262 Current market price: Rs1,008 Expansion process at DSN SEZ impacts Q4  Result highlights Q4FY2013 results below expectations: Divi's Laboratories (Divi's Lab) reported weaker than expected results during Q4FY2013 as the facility expansion process at DSN special economic zone (SEZ) impacted the production. The company's consolidated revenues declined by 8.7% to Rs655.8 crore while the operating profit margin (OPM) declined marginally by 87 basis points year on year (YoY) to 39.1%. Moreover, a higher effective tax rate (at 23% in Q4FY2013 v/s 20.2% in Q4FY2012) and a foreign exchange (forex) loss of Rs7.8 crore impacted the net profit, which declined by 16.8% YoY to Rs180.6 crore. Excluding the impact of forex loss, the adjusted net profit declined by 13% YoY to Rs188.3 crore (v/s our estimate of Rs207 crore). FY2013 misses growth guidance: The company reported a 15% year-on-year (Y-o-Y) rise in the revenues to Rs2,140 crore in FY2013, which is materially below the management's guidance of 20-25% top line growth for the year. Though the company has expanded the OPM by 100 basis points to 37.9% during the year, the effective tax rate jumped by 163 basis points to 23.3%, which restricted the adjusted net profit growth at 10.7% to Rs590.6 crore. Including the forex gains of Rs11.5 crore, the company reported a net profit growth of 12.9% to Rs602 crore. We fine-tune our estimates for FY2014 and FY2015: Taking cues from Q4FY2013 results, we have reduced our earnings estimates by 9.7% and 3% for FY2014 and FY2015 respectively. However, since we have rolled over our valuation to FY2015, we have kept our price target intact at Rs1,262 (19x FY2015E revised earnings per share [EPS]). We maintain our Buy rating on the stock.  Zydus Wellness Recommendation: Buy Price target: Rs671 Current market price: Rs542 Price target revised to Rs671  Result highlights Q4FY2013 results-strong revenue growth momentum sustained: Zydus Wellness' Q4FY2013 results are ahead of expectations largely on account of better than expected top line growth and other income. The net sales grew by 25.3% year on year (YoY) to Rs103 crore during the quarter driven by a strong double-digit growth in the pillar brands, such as Everyuth and Sugarfree (the low base effect of Q4FY2012 had also come into play during the quarter). Despite a strong year-on-year (Y-o-Y) improvement in the gross profit margin (GPM; up 176 basis points YoY) the operating profit margin (OPM) was down by 79 basis points due to higher other expenses during the quarter. The other expenses as a percentage of sales were up by 363 basis points YoY to 21.6% in Q4FY2013. The operating profit grew by 22.0% YoY to Rs30.1 crore. This along with a higher other income helped the profit before tax to grow by 24.7% YoY to Rs33.1 crore. The company received a minimum alternate tax (MAT) credit amounting to Rs11.5 crore during the quarter, resulting in a net tax credit of Rs5.1 crore. This resulted in the reported profit after tax (PAT) growing by 59.3% YoY to Rs37.4 crore during the quarter.  GPM improved YoY: The improvement in the revenue mix due to higher sales of the Everyuth and Sugarfree brands led to a 176-basis-point Y-o-Y increase in the GPM to 69.7% during the quarter. With the company likely to gain the benefits of lower vegetable oil prices and with its revenue mix improving, we expect the GPM to remain higher YoY in the coming quarters as well. However, we might see the company passing on some of the benefits of the declining vegetable oil prices through likely price-offs in the Nutralite brand in the near future.  Outlook and valuation: The relaunch of products and distribution expansion would be the key revenue growth drivers for Zydus Wellness going ahead. For Nutralite, improving the awareness of the product and expanding its distribution reach would improve its growth prospects in the long run. Overall, we expect Zydus Wellness' revenues to grow at a compounded annual growth rate (CAGR) of 18% over FY2013-15. We believe the incremental benefits from the lower input prices would be utilised to carry out higher media spending and promotional activities. Hence, we expect the OPM to sustain in the range of 24-25% over the next two years. We expect Zydus Wellness' bottom line to grow at a CAGR of 18% over FY2013-15. At the current market price the stock trades at 18.9x FY2014E earnings per share (EPS) of Rs28.7 and 15.3x FY2015E EPS of Rs35.3. With an upward revision in the earnings estimates our price target also stands revised to Rs671. We maintain our Buy recommendation on the stock.  Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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