Divi's Labs Shares Drop 8% On Q2 Missing Estimates, Margin Woes
Here’s what brokerages have to say about Divi’s Labs’ Q2 FY22 results.
Shares of Divi's Laboratories Ltd. dropped the most in 20 months after the drugmaker missed estimates in the quarter ended September, and brokerages expect margin pressure because of rising cost of raw materials.
India’s second-largest drugmaker by market value reported a net profit of Rs 606.5 crore, up 9% sequentially, in July-September, according to its exchange filing on Saturday. Analysts’ estimates compiled by Bloomberg pegged a profit of Rs 630.5 crore.
Divi's Laboratories stock fell more than 8% compared with a 0.27% decline in the Nifty 50 as of 10:25 a.m. on Monday.
Of the 20 analysts tracking the company, 11 maintained a 'buy', four suggested a 'hold' and five recommend a 'sell', according to Bloomberg data. The 12-month consensus price targets implies an upside of 8.1%. The stock's trading volume was 7.6 times the 30-day average volume for this time of the day.
Key Highlights (quarter-on-quarter)
Revenue increased 1% to Rs 1,987.5 crore, compared with an estimated Rs 2,083.2 crore.
Ebitda down 4% to Rs 818.1 crore, against the Rs 887.6-crore forecast.
Margin stood at 41.2% against 43.5%. Analysts had pegged the metric at 42.6%.
Half-yearly highlights
Revenue was at Rs 3,948.2 crore, up 13%.
Ebitda was 16% higher, while after-tax profits were up 15%.
Operating margin stood at 42.5% against 41.6% a year ago.
The company reported a forex gain of Rs 13 crore in the first half of FY22 against a loss of Rs 11 crore a year earlier.
Here’s what brokerages have to say about Divi’s Labs’ Q2 FY22 results:
Motilal Oswal
Recommends 'buy' with a target price of Rs 6,050 apiece, implying an upside of 16%.
Positive on Divi's Labs on the basis of:
1. Strong demand in the Custom Synthesis segment.
2. Reduced cost of production due to backward integration.
3. The Kakinada project is back on track.
Operating margin was lower year-on-year due to industrywide supply disruptions, said the management. The pressure on margins may be temporary as few of the company's contracts have an inbuilt price hike clause to combat input cost inflation.
Cut earnings per share estimate to reflect some slowdown in offtake related to the generics segment and higher operational costs.
Divi's Labs has completed backward integration in products in which it has 70% market share.
Divi's Labs has one of the best iodine recovery rates in the market, which is key to remaining competitive in terms of pricing in media products.
Inventory levels are high for both custom synthesis and generics to ensure a seamless supply chain.
The generics-to-CS sales split stood at 46:54 in first half of FY22.
The company has started manufacturing of Molnupiravir active pharmaceutical ingredient across all three production lines.
It may not incur further capital expenditure on this product in the near term, as it has built sufficient capacity to cater to upcoming demand for this drug, said the management.
Dolat Capital
Recommends 'accumulate' with a target price of Rs 5,400 apiece, implying an upside of 4%.
With significant capacity addition, the brokerage believes Divi's Labs is well-positioned to gain share from competitors in existing products, particularly given the ongoing shift from China.
Management remains confident on future of generic active pharmaceutical ingredients.
It believes that end-to-end integration coupled with better process technology are its key success levers.
The company has healthy gross margins (backward integration coupled with better process technology reduces dependency) and better product mix.
Key triggers:
Traction in Molnupiravir sales and no capex anticipation for at least the next two quarters.
High Court dismissed the Kakinada land case and state court fixed land price at Rs 10 lakhs per acre.
Earmarked capex of Rs 900 crore this year and another Rs 900-1,000 crore in the coming year, including the Kakinada project.
Six growth engines: established generics, new generics (capacity increased), newer molecules like contrast media API, added 16 new generic APIs to lead next phase of growth, 2 big long-term custom synthesis projects on fast track and to add new molecules in sartans (used to treat high blood pressure).
Key risks:
Decline in tonnage requirements of new chemical entity in custom synthesis segment could bring down the addressable opportunity size.
ICICI Securities
Downgraded from 'hold' to 'reduce' with a target price of Rs 4,628 per share (from Rs 4,828 earlier) implying a downside of 11% from the pre-result closing price.
Q2 FY22 performance was below estimates.
Revenue growth was driven primarily by custom synthesis business while generics declined year-on-year.
Strong positioning of Divi's Labs will help in monetising the growth opportunity in API and contract research and manufacturing space.
Power outages in China have created supply and price volatility in raw materials while shipping costs have soared with rising crude oils and container availability.
Company has completed the de-bottlenecking and expansion of plants which were delayed due to second wave of Covid-19.
All cases regarding Kakinada have been dismissed by the High Court and company expects transfer of ownership shortly.
Brokerage envisages near-term pressures growing with rising raw material prices, logistical issues and declining generics business.
Key upside risks:
Incremental innovator projects in custom synthesis, faster than expected recovery in the generics business.
Jefferies
Downgraded to 'hold' from 'buy' with a revised target price of Rs 5,563 apiece (earlier Rs 5,624) implying an upside of 7% from the pre-result closing price.
Pfizer’s Covid-19 oral drug candidate Paxlovid shows efficacy of 89% and could pose a risk to Divi’s Labs' Molnupiravir prospects which has 50% efficacy.
Surging raw materials prices are likely to restrain margin profile.
The stock trades at an expensive valuation, and the brokerage does not see major upside for the stock from here.
Flat margins, on account of the surge in raw material prices, are factored in for revised estimates.
It reported 67% gross margin in Q2 FY22 which was in-line with the previous quarter. But the company may not be immune to increasing prices in coming quarters.
Solvents are one of the key raw materials for API firms and prices have jumped 300%.
Many other key starting materials and intermediaries are also seeing upward price pressure.
Divi's Labs' Q2 margin was sustained on product mix and advance procurement of inventories.
The sustained high prices of key raw materials will eventually impact the firm.
Do not see a case for an improving margin profile for Divi's Labs and at best see the firm maintaining its current margins trend.