BoFA sees favourable risk reward in Divi’s Labs, upgrades stock to ‘buy’

BoFA also says the end of destocking cycle and peer commentary suggest bottoming out of margins in the near term for Divi’s

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Bank of America Securities (BoFA) sees a favourable risk reward scenario developing for Divi’s Laboratories as the stock trades at a reasonable valuation in comparison to other largecap peers.

The stock took beating in the past year, sharply underperforming other pharma stocks on the back of its two-year earnings downgrade cycle and margin decline to below pre-COVID levels.

The stock has corrected 8 percent this year against a 12 percent jump in the BSE healthcare index. According to BoFA Securities, the correction in the counter not only factors in the company’s weak margin performance but also stacks its risk reward better than other largecap players.

BoFA has upgraded the stock to a “buy” from “underperform” and also raised the price target by 19 percent to Rs 4,025 a share.

Buoyed by the ratings upgrade, , Divi’s Laboratories settled nearly 2 percent higher on the NSE on April 3.

“Likely bottoming of margin in near term and relative valuation provide an attractive entry point for Divi’s Laboratories,” BoFA said. “We also see lower risk to the 35 percent earnings growth over FY25-26 with valuation for Divis at 35.5x FY26 P/E appearing more compelling as compared to large peers given uncertainty on US generic pricing, regulatory risks.”

The end of destocking cycle and peer commentary suggests bottoming-out of margins in the near term, it said.

BoFA expects margins to reach 33 percent by FY26, driven by factors such as the successful launch of generic active pharmaceutical ingredients (APIs) and contributions from new drug master files (DMFs).

Analysts also expect increased supplies of contrast media APIs and Good Laboratory Practice-1 intermediate supplies to play a role, along with the ramp-up of Kakinada post-commissioning.

These improvements are projected to start contributing from the second half of FY25, leading to a 35 percent earnings CAGR with the full impact likely visible in FY26.

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