Divi's Laboratories Upgraded By BofA — 'More Than A Laggard Play'
One of the reasons for valuation holding up is the growth drivers that should support earnings recovery, it says.
Divi's Laboratories Ltd.'s rating has been upgraded to a 'buy' by BofA Securities due to its improving earnings outlook. The research firm has also raised the target price to Rs 4,025 apiece from Rs 3,380 earlier, implying a potential upside of approximately 11% from the current stock price.
The likely bottoming of margin in the near term and relative valuation provide an attractive entry point, according to a note on Wednesday.
The worst of the downgrade cycle is behind, with the medium-term growth drivers supporting margin recovery from the second half of the new financial year. The relative valuation premium has narrowed significantly in comparison to the US Gx-focused stock, with growth visibility higher in Divi's, BofA said.
The two-year earnings-downgrade cycle and margin decline to below pre-Covid levels is reflected in its underperformance. Weak active-pharmaceutical-ingredient pricing is factored into street earnings, with visible levers for earnings growth aided by investment in capacity and capabilities, according to BofA.
It sees lower risk to the 35% earnings growth over fiscal 2025–26, with valuation for Divi's, at 35.5 times the price-to-earnings ratio for fiscal 2026, appearing more compelling in comparison to large peers due to the uncertainty on the US Gx pricing and regulatory risks.
End Of Downgrade Cycle
The API pricing pressure led to Divi's margins declining to 27% in comparison to 35% pre-Covid. The end of the destocking cycle and peer commentary seems to suggest bottoming out of the margins in the near term.
BofA sees margins improving to 33% by fiscal 2026 aided by:
Traction in recently launched Gx APIs and contribution from the new drug master files.
Higher supplies of contrast media APIs, including to innovators.
The GLP-1 intermediate supplies (under qualification)
Ramp-up of the Kakinada plant — 30% incremental revenue potential.
The research firm expects these factors to contribute from the second half of the new fiscal, with the upside to fully reflect in the next fiscal, aiding a 35% compound annual growth rate in earnings. While supply diversification post the Biosecure Act is a medium-term tailwind, it does not factor this into BofA's estimates.
One of the reasons for valuation holding up despite the sharp earnings downgrade is the growth drivers that should support earnings recovery from the fiscal 2024 lows, the research firm said.
Key downside risks are worsening Gx API pricing pressure, delay in the Kakinada ramp-up and slower growth in custom synthesis, BofA said.
The stock rose as much as 2.86% during the day to Rs 3,726 apiece on the NSE. It was trading 2.3% higher at Rs 3,705 per share, compared to a 0.15% advance in the benchmark Nifty 50.
The share price has risen 24.37% in the last 12 months. The relative strength index was at 66.
Twenty-one out of the 39 analysts tracking the company have a 'buy' rating on the stock, 12 recommend 'hold' and six suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 4.5%.
