Divi’s Lab reports mute show for July-September quarter – what should investors do? ICICI Direct recommends THIS

Divi’s Lab share price: Despite Divi’s Laboratories registering muted numbers in the second quarter of the financial year 2022-23 (Q2FY23), ICICI Direct Research is confident on the overall business of the drug maker amid positive fundamentals. However, it reduced Divi’s Labs' rating to Hold from Buy.

According to ICICI Direct Research, the pharma major has reported in-line revenues with a significant miss on margins.

Revenues de-grew 6.7 per cent year-on-year (YoY) to Rs 1855 crore; EBITDA margins declined 767 basis points YoY to 33.5 per cent due to high energy and transport costs; and adjusted profit declined 18.6 per cent YoY to Rs 494 crore in the July-September quarter of FY23.

Divi’s share price grew by around 5.7 times over the past three years, ICICI Direct said, downgrading the stock from BUY to HOLD as it keeps tabs on future custom synthesis ex-Covid opportunities and execution besides steady generics traction.

The domestic brokerage set a target price Rs 3685 per share, implying an upside of 8 per cent, and valued the stock at 38x FY24E EPS of Rs 96.9.

The company has been building capacity in a few more niche APIs (Active Pharmaceutical Ingredient) as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities and upcoming opportunity size of around US$20 billion in molecules going off-patent over FY23-25

The company's progress on the Kakinada greenfield project is also one of the main triggers as the project planned outlay at Rs 1000-2000 crore.

Divi’s Lab stock was top loser on Nifty index, it declined around 9 per cent to Rs 3,419 per share on the NSE, as compared to nearly 0.5 per cent rise in the Nifty index. The counter in the last one year has corrected by over 30 per cent, while over 7.5 per cent in the last five sessions on the NSE.