Divi's stock may underperform on valuations, near term growth concerns

Revenue of the contract research and manufacturing services player was down 21 per cent y-o-y

The stock of pharma major Divi’s Laboratories is down over 6.6 per cent over the last eight trading sessions. Given the sales miss in the June quarter and valuations that factor in earnings upsides over the next couple of years, the stock could remain under pressure in the near term.

Revenue of the contract research and manufacturing services player was down 21 per cent year-on-year (y-o-y). This is a fourth consecutive quarter of revenue decline due to a high base on account of a surge in Covid-related drugs in previous periods.

Sales in the quarter, at Rs 1,778 crore, were muted too, falling short of Street estimates by 10-14 per cent. 
 

Even accounting for the higher base on account of Covid drug Molnupiravir, growth in sales was limited to 1.5 per cent y-o-y. In the custom synthesis and manufacturing (CSM) segment, which had a high base and reported a 40 per cent y-o-y fall, the growth adjusted for Molnupiravir came in at just 3 per cent.
 

Highlighting the sales trend, Kunal Randeria and Aashita Jain of Nuvama Research said that Divi’s had reached the optimum market share in several of its legacy molecules (naproxen, gabapentin), resulting in muted growth. 
 

While new molecules are a work-in-progress, replicating the success of legacy molecules remains to be seen, they added. Among the growth drivers are sartans which have witnessed pricing pressure. Contrast media, which has better pricing and high entry barriers, remains untested, says the brokerage. Due to these concerns, the brokerage has cut its earnings estimates by 3-6 per cent for FY24/FY25 and downgraded the stock.
 

Weak sales print in the June quarter led to the disappointment on the operating profit and margin fronts. 
 

Operating profit at Rs 504 crore was down 40 per cent y-o-y and was 10-18 per cent lower than estimates of some brokerages. While gross margins over the year ago quarter fell by 270 basis points, operating profit margins dipped 920 basis points. On a sequential basis, margins saw a 310-370 basis points recovery on the back of falling input costs and lower expenses.  
 

Going ahead, Kotak Institutional Research pegs a 17 per cent annual sales growth FY2023-26 adjusted for Molnupiravir riding on multiple opportunities. Within the two key segments, they expect the generic active pharmaceutical ingredient (API) business to grow annually at 14 per cent led by the 10 molecules going off patent over CY2023-25 as also the opportunities in contrast media and sartan categories. Generic APIs account for 60 per cent of Divi’s sales while custom synthesis accounts for the rest.
 

The brokerage has estimated a 21 per cent annual growth for the CSM segment for FY23-26 period aided by the upcoming phase 2/3 opportunities, including the fast-track projects and peptides.
 

The company indicated that lower raw material prices and commencement of contracts would improve revenues and margins. However, Prabhudas Lilladher Research believes that recovery will be gradual and near term growth is likely to remain muted. The brokerage has cut the earnings per share estimates by 3-8 per cent for FY24/FY25 and have downgraded the stock to reduce from hold rating.
 

Kotak Research too, has cut its earnings, estimates over the next two years by 3-4 per cent to factor in slower growth across segments.