Earnings growth priced-in Divi's Labs stock, niche biz to expand: Analysts

Analysts say pharmaceutical company's stock fully priced in

Shares of Divi’s Laboratories tanked 4.26 per cent to Rs 4,777.3 per share on the BSE during Monday’s intraday deals. This drop came despite the company reporting a 21 per cent year-on-year (Y-o-Y) rise in net profit for the first quarter (Q1) of 2024-25 (FY25).

According to analysts, the pharmaceutical giant’s Q1 performance was mixed, with revenue beating consensus estimates while net profit and earnings before interest, tax, depreciation, and amortisation (Ebitda) missed consensus estimates. Analysts at Nuvama Institutional Equities attributed the estimate miss to ongoing pricing headwinds in the active pharmaceutical ingredient (API) segment and muted nutraceutical sales. The company recorded flat growth in its nutraceutical business in Q1FY25 on a Y-o-Y basis. 

Meanwhile, Divi’s custom synthesis business continued to grow in double digits for the third straight quarter, contributing 49 per cent to sales and growing 46 per cent Y-o-Y. This was driven by sales of Sacubitril (an antihypertensive drug) and Valsartan (an angiotensin receptor blocker) combination drugs, indicated for treating chronic heart failure in adults. The generics business grew 4 per cent Y-o-Y, showing its first reversal of growth trajectory after flat growth in 2023-24 (FY24).

Financial pulse

Divi’s reported a 21 per cent Y-o-Y increase in net profit to Rs 430 crore for Q1FY25, up from Rs 356 crore in the same quarter last year. Revenue from operations rose 19 per cent to Rs 2,118 crore, up from Rs 1,778 crore. Ebitda also grew by 23 per cent to Rs 622 crore, with an Ebitda margin of 29.4 per cent, up from 28.3 per cent in the same quarter last year.

Vital signs

Nuvama said that the company has multi-year growth levers, including capital expenditure-led growth from the company’s API manufacturing unit at Kakinada, an opportunity in 2026-27 (FY27) due to a Rs 700 crore project for an undisclosed client, sustained sales of Sacubitril and Valsartan combination drugs beyond 2025-26, opportunities in contrast media and Glucagon-Like Peptide 1 Fragment, and the generic manufacturing opportunity.
 

“Considering this, we reckon FY24–27E earnings growth shall be strong at a 31 per cent compound annual growth rate. We are revising FY25 and 2025-26 earnings per share (EPS) by 3 per cent and 6 per cent, respectively, and upgrading the stock to ‘buy’ from ‘reduce’ with a target price of Rs 5,740 (earlier Rs 3,660),” analysts Shrikant Akolkar, Aashita Jain, and Gaurav Lakhotia of Nuvama wrote in a report.

 

Analysts at Motilal Oswal maintained their ‘neutral’ stance on the stock, noting that the company's valuation adequately factors in the earnings upside at the current market price. However, the brokerage was optimistic about the company’s growth outlook, observing improvements in peptide, contrast media, and other niche segments within the custom synthesis business. They also noted that Divi’s consistent service at the lab scale and manufacturing capability provide impetus for innovator customers to consider the company as a reliable supplier. The US Biosecure Act further boosts Indian contract development and manufacturing organisations, including Divi’s, analysts at Motilal Oswal noted.
 

Valuing Divi’s at 42 times its 12-month forward earnings, the brokerage gave a target price of Rs 4,680.
 

Analysts concurred that the company’s API business outlook remains muted due to ongoing price erosion and a large inventory base at the industry level. Global brokerage firm Jefferies maintained a ‘hold’ call on the company with a target price of Rs 4,830 per share.
 

However, not all are upbeat on Divi’s near-term prospects, as analysts at Kotak Institutional Equities (KIE) retained their ‘sell’ rating for the company, with a raised target price of Rs 3,600 per share, up from the earlier Rs 3,250.
 

“Although Divi’s remains positive about prospects across generic APIs and the custom synthesis business over FY25-27E, we believe there is still scope for disappoments on the top line as well as margins. We lowered Divi’s FY25-27E EPS by 1-3 per cent due to lower generics sales,” analysts Alankar Garude, Samitinjoy Basak, and Aniket Singh of KIE said in a report. The share price of the company ended 3.13 per cent lower at Rs 4,833.95 per share on the BSE.  The S&P BSE Sensex closed 2.74 per cent lower at 78,759 levels.