Brokerages cautious on Divi's Labs, valuation a big worry

Divi's management expects an improvement in terms of margin & growth on the back of softening raw material prices.

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26 Aug, 2025 12:21

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Pharmaceutical player Divi's Laboratories' lower-than-expected numbers have disappointed brokerages with some of them flagging valuation concerns, saying it limits the scope for a strong upside.

The drug-maker recorded a 49.3 percent decline in consolidated net profit at Rs 356 crore in the April-June quarter, well below the Street's estimate of Rs 407.8 crore. It topline at Rs 1,778 crore was up 21.2 percent on year but was lower than analysts' expectation of Rs 2,038 crore.

Several brokerages, including Goldman Sachs, Jefferies, HSBC, and Motilal Oswal Financial Services, have been disappointed by the performance. Shares of Divi's Labs also opened lower on August 16 and at 09.35 am, were trading 1.26 lower at Rs 3,683.45 on the NSE.

A sequential improvement in operating profit margin, or the EBITDA margin, which was at 28.3 percent, up from 25 percent in the March quarter, was a saving grace for the company. The EBITDA margin, however, contracted by 930 basis points from the year-ago quarter.

One basis point is one-hundredth of a percentage point.

Goldman Sachs attributed the sequential improvement in margins to an uptick in gross margins. It also retained its “buy” call on the stock with a target price of Rs 3,885.

Jefferies, too, has a “buy” call on the stock and raised the price target by over 19 percent to Rs 4,300. The firm sees a ramp-up of the project for manufacturing Sacubitril Valsartan (a drug used in heart failure) and other base business products as near-term growth triggers for Divi's. It also expects the company's new contrast media project to be online by the end of FY25.

But not all brokerages share the optimism. HSBC, Nuvama Institutional Equities and MOSFL point to expensive valuations of the stock.

The three brokerages believe that the valuation prices in the growth triggers, limiting the scope for a strong upside.

On that account, Nuvama and HSBC have a “reduce” call on the stock, while MOFSL maintains a “neutral” rating. The three brokerages also have target prices for the stock in the range of Rs 2,890-3,430, reflecting a downside of 8-22.5 percent from the closing price on August 14.

HSBC also sees a long road to recovery for Divi's, a view shared by Nuvama. "We acknowledge the promising opportunities for Divi's arising from its contrast media business and custom synthesis project along with easing raw material prices which could serve as the next leg of growth drivers for the company, but also note the uncertainty around it," Nuvama said in its report.

MOFSL is confident of a brighter future for Divi's because of its leadership position in select molecules but said current valuations adequately factor in the earnings upside over the next two years.

Nuvama and MOFSL have cut their earnings estimates for FY24/FY25 by 3 percent/6 percent and 3 percent/5 percent, respectively.

Also Read | Divi's Labs Q1 results: Net profit slumps 49% to Rs 356 crore, lags estimate

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