Divi's Lab surges 10% in two days on strong revenue growth guidance

The stock was quoting at its highest level since February 1, 2023 and has recovered 25 per cent from its 52-week low of Rs 2,730, touched on March 14, 2023

Shares of Divi’s Laboratories rallied 4 per cent to Rs 3,407 on the BSE in Tuesday’s intra-day trade. In the past two days, the stock of the pharmaceutical company has surged 10 per cent as the company’s management expects margins to normalize by the end of FY24 and has guided for a double digit revenue growth.

On Tuesday, the stock was quoting at its highest level since February 1, 2023. It has recovered 25 per cent from its 52-week low of Rs 2,730, touched on March 14, 2023.

Divi’s is engaged in manufacturing generic active pharmaceutical ingredient (APIs) and intermediates, custom synthesis (CS) of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like carotenoids and complex compounds like peptides and nucleotide revenues.

In CS, the company maintains a strong relationship with global big pharma players, while in generics, it enjoys significant market share in products like Naproxen, Dextromethorphan and Gabapentin among others.

Divi’s delivered a better-than-expected performance in the January-March quarter (Q4FY23), driven by improved traction in the generic API segment. The CS business also reported a slow uptick in sales.

Motilal Oswal Financial Services raised its earnings estimates for FY24/FY25 by 7 per cent/6 per cent to factor in a scale-up in commercial contracts in the CS segment, a reduction in the availability of high-cost raw materials, and improvement in operating leverage.

"While the outlook is improving across segments of CS and generic APIs on the back of new launches and sharp focus on cost minimization, the current valuation adequately factors in the earnings upside. Hence, we maintain our neutral rating on the stock," the brokerage said in result update.

Post Q4FY23 earnings, analysts at ICICI Securities upgraded the stock from hold to buy as the quarter’s performance (albeit lower than expected margins) and management commentary provides satisfactory visibility of performance restoration with a lag. Fast tracking of Kakinada capex also provides comfort on the expansion front.

The company has been building capacity in a few more niche APIs with opportunity size of $20 billion in molecules going off-patent in FY23-25. Progress towards six identified growth areas- 1) Established generics, 2) Existing generics, 3) New generics, 4) Sartan APIs, 5) Contrast Media, 6) CS. Commencement of Kakinada plant from FY25 onwards, which is earmarked for nutraceuticals, advanced intermediates, KSMs among others are key triggers for future price performance, the brokerage firm said.

Meanwhile, Divi’s Labs reported weak performance in FY23 given a high Covid base and higher COGS, resulting in the weakest ever margins (OPM of 25 per cent in H2FY23 vs +33-35 per cent in preceding quarters). Before FY21/22, Divi’s GMs were between 61-63 per cent range vs 57 per cent reported in H2, suggesting that H2 may be an aberration, said analysts at Prabhudas Lilldher in a result update.

The management suggested moderation of raw material prices and also commencement of some CDMO and contrast media contracts, which should aid revenues and margins, in the brokerage's view. However, they expect recovery will be gradual and near-term growth is likely to remain muted.