Divis Labs falls 9% on weak operational performance in September quarter

Ebitda margin contracted by 180 basis points year-on-year to 41.5 per cent in Q2FY22 due to higher other expenses/employee costs.

Shares of Divi's Laboratories slipped 9 per cent to Rs 4,751 on the BSE in Monday's intra-day trade as the company's earnings before interest, tax, depreciation and amortization (ebitda) margin contracted by 180 basis points year-on-year (YoY) to 41.5 per cent in September quarter (Q2FY22) due to higher other expenses/employee costs.

The stock of the pharmaceutical company had hit a 52-week high of Rs 5,425 on October 18, 2021. In comparison, the S&P BSE Sensex was down 0.11 per cent at 60,002 points at 09:39 am.

In Q2FY22, Divi's Labs' profit after tax (PAT) grew by 17 per cent to Rs 606 crore as against a PAT of Rs 520 crore in the corresponding quarter of previous fiscal. Revenues also grew 13.6 per cent to Rs 1,987 crore from Rs 1,749 crore in the year-ago quarter.

"The company delivered in-line Q2FY22 earnings led by strong offtake in the Custom Synthesis (CS) segment and ramp up in the Nutraceuticals segment. It has enough capacity to cater to upcoming demand of Molnupiravir", Motilal Oswal Financial Services said in a result update.

It added: We remain positive on Divi's on the back of strong demand in the CS segment, continued cost efficiencies with enhanced backward integration, and the Kakinada project being back on track.

That apart, it also said the weakness in Ebitda margin could be due to industrywide supply disruptions and believes the pressure to be temporary as few of Divi's contracts have an inbuilt price hike clause to combat input cost inflation.

However, it reduced FY22E/FY23E EPS estimate by 5 per cent/2 per cent to reflect some slowdown in offtake related to the Generics segment and higher operational costs.

"We expect a 34 per cent earnings CAGR over FY21-23E, led by increased business prospects from CS and Generics, benefits from Molnupiravir supply to the innovator, improved growth in Nutraceuticals, new product additions in the Generics segment, as well as ~240bp margin expansion on process and productivity improvements," the brokerage firm said in results update.