Divi's Labs fails to cheer up brokerages with weak Q2 results, sharp margin contraction

The EBITDA margin for Divi's contracted sharply to 25.1 percent against 33.5 percent in the base period.

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26 Aug, 2025 12:21

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Pharmaceutical major Divi's Laboratories reported a weak set of earnings for the July-September quarter, marked by a sharp contraction in operating margins which have turned brokerages bearish on the stock.

The company missed the Street estimate by recording a 29.50 percent year-on-year decline in consolidated net profit to Rs 348 crore in Q2, when its revenue increased a mere 3 percent.

Operating margin also contracted sharply to 25.1 percent as against 33.5 percent in the base period, facing the heat of lower pricing in the generic API (active pharmaceutical ingredients) segment.

While Divi's legacy molecules are reeling under pricing pressure, its optimum market share in the category restricts the scope of any further growth upside. Hence, Nuvama Institutional Equities believes future growth for Divi's to be heavily dependent on new growth drivers.

The company too seems to be taking this into account as its plans for capacity expansion at its Kakinada plant which may help free up capacities in Unit 1 and Unit 2 to pursue newer growth opportunities.

While Nuvama does acknowledge that the capacity expansion underway and promising opportunities for Divi's Labs in contrast to media and peptides could serve as its next leg of growth drivers, the brokerage is also mindful of the uncertainty over its performance.

On that account, the brokerage feels its estimates for double-digit revenue and nearly 17 percent PAT CAGR (compounded annual growth rate) for Divi's over FY23–26 factors in growth from these opportunities. Likewise, Nuvama has a 'reduce' call on Divi's Labs, with a price target of Rs 3,070.

Motilal Oswal cut its earnings estimate for Divi's by 5 percent and 3 percent for FY24 and FY25, factoring in increased competition in the API segment, and higher tax rate, which are partly offset by improved growth momentum in the nutraceuticals business.

The brokerage also believes that the current valuation adequately factors the upside in earnings and hence it maintains a 'neutral' call on the stock with a price target of Rs 3,330.

Foreign brokerage firm Jefferies too cut its FY24-26 EPS (earnings-per-share) estimates for Divi's by 15-18 percent on the back of its weak Q2 show. In addition, Jefferies also downgraded the stock to a 'hold' while slashing its price target by over 18 percent to Rs 3,510.

While the firm does expect some sequential pick-up in growth from Q3, it also feels that key growth drivers like scale-up in new capacities for contrast media still stand a year away.

At 09.28 am, shares of Divi's Laboratories settled nearly a percent lower at Rs 3,475.15 on the NSE.