Growth worries to keep Divi's Labs under pressure in the near term

Valuations, too, are on the higher side, say brokerages

The country’s second largest pharma company by market capitalisation, Divi’s Laboratories was the biggest loser among Nifty stocks shedding 6 per cent in trade on Tuesday. While its March quarter performance was robust, brokerages cut their earnings estimates sharply on concerns related to growth trajectory and valuations.  

Tushar Manudhane and Gaurang Sakare of Motilal Oswal Research have reduced their earnings per share estimates over the next two years by 11-14 per cent. They cite reduced sales of Covid-related products considering the low number of cases globally, gradual uptick in growth in the generics segment and delay in implementation of Kakinada capex.

The issue is that growth in the March quarter and FY22 was driven by Covid drug Molnupiravir. The drug contributed just under a quarter (estimates range from $200 million to $280 million) of FY22 revenues and a third to the bottomline. This proportion is likely to come down substantially in this financial year with Jefferies Research estimating the same at a tenth ($20 million) of what the drug fetched in FY22.
 

The generic business, which accounted for 34 per cent of revenues in FY22, is under pressure due to lower prices and volume decline in key products such as Naproxen (pain killer) and Dextromethorphan (cough suppressant). Analysts at IIFL Research have downgraded the growth estimate for the company’s base generic business from 14 per cent to 7 per cent for FY23, given that the company expects 6-12 months for the base generic business to revert to the growth trajectory.

While the company has enough land for expansion and is planning a Rs 2,000-3,000 crore capex plan over the next three years to set up new plants, the delay on the Kakinada expansion due to delay in government clearance is a dampener.

The long-term prospects remain sound, led by market share gains, growth from new areas such as contrast media, increasing its presence in sartans, expanding its custom synthesis basis and its focus on products going off-patent. However, in the near term, Sharekhan Research believes that increasing raw material and freight costs, pricing pressures in the US generics could weigh on its performance.

Kotak Securities in a report on Monday indicated that valuations remain elevated despite the recent correction with Divi’s witnessing a lower derating versus its global peers in FY2022. The brokerage has a target price of Rs 3,500 (current price at Rs 3,662 per share). Given the near-term uncertainties, investors should await growth trends over the next couple of quarters before considering the stock.