Divi's Labs Q2 Results Review - Pricing Pressure In API Segment Hurts Profitability: Motilal Oswal

Motilal Oswal Report

Divi's Laboratories Ltd. delivered a miss on Q2 YF24 earnings. While revenue was in line with estimates, profitability was lower than expectation, partly due to lower pricing in the generic active pharmaceutical ingredient segment. We reduce our earnings estimate by 5%/3% for FY24/FY25, factoring in

1. increased competition in the API segment, and

2. higher tax rate, partly offset by improved growth momentum in the Nutraceutical business.

We value Divi at 35 times 12 million forward earnings to arrive at a price target of Rs 3,330. 

We are building 25% earnings compound annual growth rate over FY23-25 (adjusting for Covid-led business in FY23). This is on the back of improved visibility for contracts in the custom synthesis segment as well as ramp-up in products in contrast media space.

We believe the current valuation adequately factors the upside in earnings. We reiterate our 'Neutral' stance on the stock.

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