Margin concerns, high valuations weigh on Divi’s Laboratories’ stock after Q2 results

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26 Aug, 2025 12:21

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Shares of Divi’s Laboratories Ltd fell more than 7 percent on November 8 on the National Stock Exchange (NSE), even as the Nifty50 index was in positive territory.

The company’s September quarter (Q2FY22) results, announced on November 6, were broadly in line with analysts’ estimates, offering no reason for investors to cheer.

There are concerns about the company’s margins in the days to come. “Rising raw material prices and logistical issues, coupled with declining generics business, would restrict margins at the current levels in the near term,” ICICI Securities Ltd said in a report on November 7.

In Q2FY22, Divi’s Labs’ consolidated gross profit margins remained flattish at 67 percent. However, EBITDA (earnings before interest, tax, depreciation and amortization) margin contracted by 120 basis points (bps) year on year (YoY) to around 41.2 percent.

One basis point is a hundredth of a percentage point. EBITDA margin has contracted by 230bps QoQ.

Higher-than-expected rise in other expenses (up almost 22 percent YoY) played spoilsport at the operating level. Further, employee costs increased by 16 percent YoY. As such, the company’s absolute EBITDA has increased by 10.4 percent YoY to Rs 818 crore. Revenue growth was a tad faster at 13.6 percent to Rs 1,988 crore, driven mainly by the custom synthesis business whereas the generics business declined.

In its conference call, the management told analysts it has recorded some sales of Molnupiravir in Q2. Further, Divi’s may not incur major capex on this product in the near term as it has built adequate capacity to meet the potential demand for the drug. Needless to say, this would support the company’s growth prospects.

Analysts from Kotak Institutional Equities said in a report on November 7: “Divi’s has laid out a multi-pronged growth strategy, including market share gains, in existing APIs, introduction of new products and focus on sartans (used to treat patients with hypertension and those with certain heart or kidney diseases) and contrast media (used to enhance blood and perfusion in tissues), which will help drive 17 percent earnings per share (EPS) CAGR over FY2021-24E.” CAGR stands for compound annual growth rate.

To be sure, valuations are not cheap. In calendar year 2020, Divi’s stock appreciated as much as 108 percent. What’s more, performance this year, too, is nothing to crib about. Even after taking into account Monday’s decline, the stock has seen around 25 percent rise so far in calendar year 2021.

“Coupled with the recent rally in the stock that has made valuations expensive, we downgrade the stock to REDUCE (rating) from Hold with a revised target price of Rs 4,628/share, based on 42 times FY23E EPS (earlier Rs 4,828/share),” ICICI Securities analysts said.

At 3.10 pm, the share was trading at around Rs 4,841, down 7 percent, on the NSE.