Divi’s Labs rises 3% as Q4 earnings improve sequentially; Here’s what brokerages say

Shares of Divi’s Laboratories shed initial jitters and rose on May 22 as investors reacted positively to the sequential improvement in the drugmaker’s quarterly earnings, released over the weekend.

At 10.58 am, shares of Divi’s Laboratories were trading with gains of 2.55 percent at Rs 3,177.40 on the National Stock Exchange.

Dragged down by a higher base of COVID sales of Molnupiravir and elevated input costs, the company’s net profit for the January-March quarter plunged 63.89 percent on year to Rs 318.79 crore. The decline in net profit was much steeper than the nearly 58 percent fall estimated by a poll of brokerages conducted by Moneycontrol.

Sequentially however, the company’s non-COVID custom synthesis projects played a significant role in driving a 2.53-percent increase in their bottomline.

Moreover, revenue declined by 23.52 percent to Rs 1,908.17 crore compared to the corresponding quarter last year. It’s worth noting that the market had estimated Divi’s fourth-quarter revenue to be around Rs 1,863.50 crore. Nonetheless, there was a growth of 12.92 percent compared to the previous quarter’s revenue of Rs 1,689.83 crore.

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High input costs also weighed on the EBITDA (Earnings before interest, taxes, depreciation, and amortization) margin, which contracted to 25 percent in Q4, significantly lower than the 43.9 percent seen in the year-ago period. The Street had estimated the margin to come in around 29 percent.

Brokerages also seem to be divided on the future prospects for the pharma company. Here’s what they believe:

Global research and broking firm Jefferies upgraded the stock to ‘buy’, also raising its price target by 41.5 percent to Rs 3,610. The upgrade was attributed to the company’s Q4 earnings, which were ahead of the broking firm’s estimates.

Also Read: Divi’s Labs Q4 net profit declines 64% to Rs 318.79 crore, lags estimate

Jefferies believes Divi’s Labs should be back to achieving mid/high teen revenue from the second quarter of the current fiscal. The firm also anticipates faster EBITDA  growth due to leverage benefits and softening input costs. Pricing in the same, the broking firm also raised its FY24/FY25 earnings-per-stock (EPS) estimates for the drugmaker by 4 percent/13 percent.

Motilal Oswal Financial Services has also raised its earnings estimates for FY24/FY25 by 7 percent/6 percent to factor in a scale-up in commercial contracts in the CS (Chloroquine-Sensitive) segment, a reduction in the availability of high-cost raw materials, and improvement in operating leverage. Despite that, MOFSL retained its ‘neutral’ rating for the stock, with a price target of Rs 2,900.

Also Read: Divi’s Labs Preview: Unfavourable base, elevated input costs to turn Q4 a sour pill

“While the outlook is improving across segments of CS and generic APIs (Active Pharmaceutical Ingredients) on the back of new launches and sharp focus on cost minimization, the current valuation adequately factors in the earnings upside,” the broking firm stated in its report.

Another brokerage, Kotak Institutional Equities does expect margins for Divi’s to recover hereon, albeit slowly. “Despite a healthy sequential sales uptick in both key segments, Divi’s Q4 margins disappointed again as the company grappled with high-cost inventory and elevated pricing pressure in generic APIs,” KIE highlighted in its report. Likwise, the brokerage firm retained its ‘sell’ call for the stock, but raise its price target by 3 percent to Rs 2,450.

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