Brokerages downgrade Divi's Labs post Q2 letdown; stock falls 11% in 2 days

Shares of Divi’s Laboratories hit a 52-week low of Rs 3,344.60, down 2 per cent on the BSE in Wednesday’s intra-day trade. In past two days, the stock of pharmaceuticals company has cracked 11 per cent after it reported a disappointing set of numbers with consolidated profit after tax (PAT) down 18 per cent year-on-year (YoY) and 30 per cent quarter-on-quarter (QoQ) at Rs 493.60 crore for the September quarter.

Divi’s Lab’s revenue from operations during the quarter under review de-grew 6.7 per cent YoY and 17.8 per cent QoQ at Rs 1,854 crore. Analysts expected profit of around Rs 558 crore and revenue of Rs 2,074 crore for the quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margins declined 767 bps YoY to 33.5 per cent due to high energy and transport costs.

At 09:22 am, the stock traded 2 per cent lower at Rs 3,340, as compared to 0.21 per cent rise in the S&P BSE Sensex. It fell below its previous low of Rs 3,365.10, hit on May 26, 2022.

Divi's Q2 numbers were a miss, both, on the revenue front as well as the profit as per the consensus estimates and also lower on a sequential basis. Margins for Q2FY23 stood at 33.5 per cent compared to 37 per cent in the previous quarter and probably this is the lowest margins that the company has ever reported, Anmol Das, Head of Research, Teji Mandi said in the result update.

Analysts at ICICI Securities downgrade the stock from 'BUY' to 'HOLD' as the brokerage firm said it will keep tab on future custom synthesis ex-Covid opportunities and execution besides steady generics traction.

The company has been building capacity in a few more niche APIs as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities and upcoming opportunity size of $20 billion in molecules going off-patent over FY23-25.  Commercialisation of new API and multipurpose facility for custom synthesis (CS) and progress on new DMF filings and contrast media APIs are among key triggers for future price performance, analysts said.

“Divi's delivered an earnings miss in Q2FY23. Reduced traction in CS, coupled with lower operating leverage, resulted in an earnings decline for the first time after 12 quarters of a strong performance,” Motilal Oswal Financial Services said in result update.

The brokerage firm cut its FY23/FY24 estimates by 18 per cent, factoring in a deceleration in the CS business and commercial benefit from certain newer projects on completion of clinical trials (FY24 onwards), moderation in the API business, and delayed scale-up in the Nutraceuticals business, despite a capacity expansion. The brokerage firm also lower our P/E multiple to 30x from 33x to factor in lower visibility on Kakinada capex, considering capex to be one of the leading growth indicators for Divi's.