Divi's Labs gains 5% as USFDA issues no observations for Telangana plant

The Company's Unit-I facility at Lingojigudem, Bhuvanagiri Yadadri district, Telangana has been inspected by the USFDA from the November 11, to November 15, 2019.

Shares of Divi's Laboratories climbed 5 per cent to Rs 1,736 in the intra-day trade on the BSE on Friday after the company announced that the US health regulator FDA issued no 483 observations for its Unit-1 facility in Telangana. The stock of the drug maker was trading close to its 52-week high price of Rs 1,776, touched on October 27, 2019.

“The Company's Unit-I facility at Lingojigudem, Bhuvanagiri Yadadri district, Telangana has been inspected by the US Food and Drug Administration (USFDA) from the 11th of November, 2019 to the 15th of November, 2019. The inspection has been concluded with no 483 observations,” Divis Labs said in a regulatory filing.

This inspection was a general Current Good Manufacturing Practice (cGMP) inspection by the USFDA, it added.

In the past two weeks, the stock of Divi's Labs had underperformed the market by falling 6 per cent, after the company’s EBITDA margin shrank 410 bps (basis points) YoY to 35.3 per cent in September quarter (Q2FY20). In comparison, the benchmark S&P BSE Sensex was up 0.39 per cent during the same period till Thursday.

“With the strong chemistry skillset in place, Divis remains on track to benefit from the CRAMS (contract research and manufacturing services) opportunity. It is also on track in terms of capex to cater to future needs of customers, providing visibility of robust growth in earnings,” Motilal Oswal Securities said in a result update, with ‘neutral’ rating on the stock.

In order to further augment the capacities besides preparing for growing opportunities arising due to China factor, the company has earmarked an aggressive capex of around Rs 1,700 crore (including Rs 300 crore for backward integration), over and above around Rs 2,000 crore spent in the last five years.

Analysts at ICICI Securities expect the full-blown impact of this massive investment to fructify from FY22 onwards (after considering the time lag for regulatory inspections).

At 12:26 pm, Divi's Labs was trading 3 per cent higher at Rs 1,712 against a 0.51 per cent rise in the S&P BSE Sensex. A combined 1.1 million equity shares changed hands on the counter on the BSE and NSE so far.