Home / Markets / Mark To Market /  Divi’s Lab has growth issues after a solid March quarter

BENGALURU/MUMBAI : Divi’s Laboratories Ltd’s shares have fallen by around 15% in the past two days with the stock dropping to a 52-week low on Tuesday on NSE. This is despite the company’s stellar results for the three months ended March (Q4FY22). At 2,518 crore and 1,104 crore, year-on-year (y-o-y) consolidated revenue and Ebitda growth were 41% and 54%, respectively. Ebitda is earnings before interest, tax, depreciation, and amortization. Divi’s manufactures generic active pharmaceutical ingredients (APIs) and is also in the custom synthesis (CS) business.

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In Q4, strong traction in the CS segment boosted performance and analysts estimate this to be driven by higher sales from molnupiravir, anti-viral drug for covid. Divi’s is an authorized manufacturer of molnupiravir API for Merck. On the flip side, the API segment was subdued in Q4 because of intense pricing pressures.

Higher molnupiravir sales are also considered the key factor that has aided growth for the year as a whole with revenues increasing by 29% to 8,959 crore in FY22 and Ebitda by nearly 36% to 3,882 crore.

However, the base is high now and this would pose a challenge to growth. Analysts worry about the sustainability of CS sales growth. As such, the contribution from molnupiravir is expected to decline in FY23, which would have a bearing on overall revenue growth.

“In our estimates, molnupiravir added about $200 million to the topline in FY22, implying ex-molnupiravir growth of 7% for rest of the business. We factor in $20 million molnupiravir sales in FY23 and ex-molnupiravir we build in 11% y-o-y growth. Based on our assumptions, we estimate FY23 topline will decline by 6% y-o-y and Ebitda by 11% y-o-y," said analysts from Jefferies India in a report on 23 May.

Adding to the woes is the delay in the Kakinada project, which is said to be weighing on investor sentiment.

The company has told analysts in a call that it is waiting for government clearance and the delay would not impact its potential to pursue business opportunities. Meanwhile, the Divi’s stock has declined by nearly 22% so far this calendar year. However, scope for meaningful gains appear capped.

“The current margin strength is unlikely to continue once anti-virals sales in custom synthesis fade and absence of stability in generic API sales remains a concern," said analysts from Ambit Capital in a report on 24 May.

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