Divi’s Labs Q3 Review: Shares Fall As Brokerages Cut Target Price After Profit Miss

Shares of Divi's Laboratories Ltd. fell after its third-quarter profit declined, missing analysts' estimates, even as brokerages raised concerns over near-term challenges to profitability and a moderate earnings outlook.

That led some brokerages to cut their target price on the company.

The drugmaker saw custom synthesis or compounds prepared on behalf of customers contributing 40% of its revenue in the quarter ended December. The remaining 60% came from generic molecules.

Total revenue fell 32% over a year earlier, while net profit jumped 66% in the October-December quarter. Margins fell from 44% to 23.9% in Q3 FY23.

Divi's shares were trading 2.08% lower on Monday in the pre-open price after the company reported third-quarter numbers on Friday. That compares with an almost unchanged benchmark Sensex.

Of the 25 analysts tracking the company, eight maintain a 'buy,' eight suggest a 'hold,' and nine recommend a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 9.9%.

Here’s what brokerages have to say about Divi’s Labs’ Q3 FY23 results:

• Maintains a 'neutral' rating with a target price of Rs 2,620 apiece, implying a downside of 9%.

• Lower-than-expected Q3 FY23 earnings, led by reduced sales across API and custom synthesis.

• The pricing pressure in the API segment affected the profitability for the quarter.

• Cut estimates to factor in

  a) the adverse impact on API prices due to increased competition,

  b) increased raw material costs,

  c) slower-than-expected pick-up in non-covid contract research and manufacturing service projects.

• Company continues to build on its strong chemistry skill sets to enhance its offerings for custom synthesis business

• It is also adding new niche molecules in the API segment.

• Expect a 15% earnings CAGR over FY23–25 compared to 30% over FY19–23.

• Sees near-term headwinds on profitability and a moderate earnings outlook.

• The management expects profitability to improve going forward with the new introduction of API, the contrast media segment, and an improved outlook in the custom synthesis segment.

• It received all the necessary clearances and is firming up plans to start construction at Kakinada.

• Maintains an 'underperform' rating with a target price of Rs 2,550 apiece (revised from Rs 3,045), implying a downside of 12% to Friday's closing price.

• Q3 FY23 results were significantly below their estimates, with Ebidta margins at multi-year lows.

• Expect margins to improve sequentially as input cost pressures ease.

• But growth levers kick in only in FY24.

• Both custom synthesis and generics declined due to an inferior product mix, pricing pressure for generics, and high input costs.

• Margins are expected to rebound in Q4 of FY23 but will take a few years to reach historical levels.

• Volumes rebound of generics should provide operating leverage benefit.

• However, company will take atleast two years to achieve 40%-plus margins as a contribution from custom synthesis increases.

• Key growth levers: two custom synthesis in phase 3 and revenue contribution should start from Q1FY24, commercial production from gadolinium-based contrast media from Q1FY24, invest in new technologies/new chemistry, new launches in generics (sartans portfolio) to contribute from FY25, Kakinada facility sales for non-regulated markets in near-term.

• Recommends a 'hold' rating with a target price of Rs 2,617 apiece, implying an downside of around 9%.

• Q3 FY23 can be considered as the new base with zero Molnupiravir sales.

• Margins were lower than pre-covid levels, as company faced price erosion and input cost inflation.

• Divis Labs is confident of maintaining double-digit volume growth in its generics portfolio.

• Custom synthesis business fell 58% year-on-year as Molnupiravir sales completely phased out this quarter.

• Expect pressure to ease a bit on the custom synthesis front.

• The company is looking to commercialise two fast track non-covid projects.

• Supply of iodinated contrast media products too could start contributing to its revenues in Q1FY24, though a full potential ramp-up could take some years.

• Kakinada facility would start contributing to revenues FY26-FY27 onwards.

• Ebidta margin in the company’s base portfolio (ex-Molnupiravir) has significantly eroded due to pricing pressure in the generics business.

• Future custom synthesis projects could provide some relief on margins.

• Company targeting to launch generic products that will lose exclusivity in the US in CY23- CY25.

• Expect this to aid in maintaining growth momentum in the generics business.

• The company will be investing in gadolinium, continuous flow chemistry and photochemistry projects.

• Risk: Top-five products/clients contribute 60%/54% of its total revenue, respectively in FY22, any loss of key clients could have a material impact on the company’s earnings; Import alert/OAI status on any of its facilities.