Divi’s Lab go down by 5%: concerns over “unsustainable growth”

Stock has been downgraded to ‘hold’ from ‘buy,’ with the target price shrunk to Rs 4,250 from Rs 5,250 previously. Experts warned that the abnormal growth is unsustainable as the pandemic begins to fade globally.

Despite a strong performance, Divi’s Laboratories Ltd fell nearly 5% to a near 13-month low on Tuesday, as experts warned that the abnormal growth is unsustainable as the pandemic begins to fade globally.

On the BSE, the stock hit a low of Rs 3,676.85 per share, the lowest since 5 April 2021, and fell as much as 5% from its previous close. The shares were trading at Rs 3725 on the BSE at 9.40 a.m., down 4.42 percent from its previous close. Divi’s Lab’s net profit increased by 78% to Rs 895 crore in the March quarter from Rs 502 crore the preceding year. Revenue from operations increased by 40% to Rs 2,518 crore from Rs 1,788 crore the preceding year.

“We believe this abnormal growth was derived from Covid-led drugs (similar to last quarter). And is unsustainable going forward with the pandemic subsiding. All over the world, except in China. We thus foresee lower growth on a higher base. On the margin front as well, the inflationary environment, coupled with a growth taper, would weigh on performance”. BoB Capital said in a note to investors.

Downgrade from Hold to Buy

The stock has been downgraded to ‘hold’ from ‘buy,’. With the target price shrunk to Rs 4,250 from Rs 5,250 previously. During the quarter, custom synthesis increased by 60% year on year, while generic APIs decreased by 66%. EBITDA margin increased by 380 basis points year on year to 43.9 percent. Owing to lower other expenses/employee costs as a percentage of sales (-280bp/-180bp).

“We lower our FY23/FY24 EPS estimate by 11 percent/14 percent, factoring in: (a) reduced sales of COVID-related products, considering the low number of cases globally, (b) a gradual uptick in growth in the generics segment, and (c) delay in implementation of Kakinada capex. We value DIVI at 33x 12-month forward earnings to arrive at our target price of Rs 4,480,” Motilal Oswal Research said in a note to investors.

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