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HDFC Securities
Divi’s Labs (Buy)
CMP: ₹623.10
Target: ₹735
Established in the year 1990, with Research & Development as its prime fundamental, Divi’s Laboratories focussed on developing new processes for the production of Active Pharma Ingredients (APIs) and Intermediates. The company in a matter of short time expanded its breadth of operations to provide complete turnkey solutions to the domestic Indian pharmaceutical industry. The US FDA has finally put an end to speculation about the outcome of its December inspection of Divi’s Laboratories’ Unit 2 facility in Visakhapatnam by issuing an import alert (IA). However, the US FDA has also exempted 10 key products in which Divi’s has a significant market share in the US. Post the IA, we have cut our base case earnings estimates by 20-25 per cent for FY18/FY19E. Our estimates do not include the potential incremental impact of further regulatory action by other authorities, or the possibility of customers choosing to procure their APIs from other sources. In order to factor in these risks as well, we have lowered our base case multiple from 20x to 16x on FY19 EPS.
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