Why Divi's Lab Share is Falling

Editor's note: Yesterday during market hours, India's second largest pharma company by market cap Divi's Lab reported its Q2 results.

Post declaring results, shares of Divi's Labs slumped up to 9%.

Divi's Lab reported a fall in profits and revenues while margins also contracted.

Sure enough, Mr Market was quick enough to factor this in the company's share price.

Weak quarterly result isn't the only reason why Divi's Lab is under pressure of late.

In October 2022, we wrote to you about those reasons and explained why Divi's Lab share was falling.

Continue reading to know more...

Why Divi's Lab Share Price is Falling

According to you, which company is considered as the gold standard of the pharma industry?

Dr Reddy's Lab? Sun Pharma?

While these two companies may be the first ones that come to your mind, there's another company which is counted among the best pharma stocks in India.

Divi's Laboratories.

Some of you might argue that if Divi's Lab, the second largest pharma company in India, is considered as the gold standard, how come its share price is getting battered so heavily?

To put things into perspective, the share price of Divi's Lab has fallen around 26% so far in 2022. On a yearly basis, the stock is down even more, 32%.

In the past five trading sessions, Divi's Lab has fallen more than 10%. Most of the losses can be attributed to yesterday's session where the stock slumped around 9%.

Let's understand why this bluechip growth stock is witnessing heavy selling this year.

Why Divi's Lab Share Price is Under Pressure

#1 Weak Q2 Results

On 7 November 2022, Divi's Lab reported its Q2 results. The Hyderabad-based drugmaker reported a drop of 19% in its consolidated net profit at Rs 4.9 bn.

This on the back of a 3.6% decline in revenues.

The street was expecting the company to report a profit of Rs 6.3 bn.

For the quarter under review, Divi's Lab reported a forex gain of Rs 300 m, as against a forex loss of Rs 70 m for the year-ago period. The company is highly exposed to forex risk as it derives a significant chunk of revenue from exports.

The drugmaker's EBITDA was down 24.1% YoY at Rs 6.2 bn.

While the biggest concern was margins, which stood at 33.5% and were down 767 bps on a YoY basis.

In the previous quarter too, the company had reported a 600 basis points drop in margins on the back of slowdown in its base business.

To offer respite, the company's MD had said in the June 2022 quarter conference call that the effect on margin was temporary amid times of high raw material costs.

#2 High Growth Seems Unlikely Going Forward

You would be aware that pharma stocks and diagnostics stocks were big gainers during the pandemic as they saw a sharp rise in their sales.

The export figures of Indian pharmaceutical companies shot through the roof owing to demand for Covid-19 related drugs and vaccinations.

Divi's Laboratories was no exception and saw its net profit zoom 49% in financial year 2022.

Financial Snapshot of Divi's Lab

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenues	38,915	49,463	53,944	69,694	89,598
Growth (%)	-4%	27%	9%	29%	29%
Operating Margin	13,762	20,287	20,128	29,237	39,970
OPM (%)	35%	41%	37%	42%	45%
Net Profit	8,770	13,527	13,765	19,843	29,605
NPM (%)	23%	27%	26%	28%	33%

Data Source: Ace Equity

Divi's Lab benefitted big time from sales of antiviral drug - Molnupiravir. However, as Covid cases reduced and the pandemic effect started to go away, there was an expected drop in the sales of Molnupiravir.

So it was expected that revenues for financial year 2022-23 could be lower than the previous year on the back of a high base.

And on expected lines, the effect was already visible in the company's first quarter results. In Q1, revenues from the custom synthesis (CS) business fell sequentially.

Therefore, one reason why Divi's Lab is falling is that the high growth it saw last year seems to be unsustainable going forward.

Another reason why shares of the company are under pressure is due to margin concerns.

When Divi's Lab reported June quarter results, the company reported a 26% growth in net profit, aided by 17% growth in revenues amid growth in custom chemical segment.

Now this may seem good from the outside but it's a classic example of a stock falling after reporting good quarterly results.

The company's margins came under pressure amid rising raw material prices. Apart from that, higher employee expenses and other expenses on account of higher freight, power and energy costs, impacted Divi's operating profit margin.

A falling rupee also plays a factor here. The company imports around 46% of the raw material consumption.

The domestic currency is in news hitting record lows and heading towards the 85-mark. Such big fluctuations always make for forex fluctuation risk.

Finally, Divi's Lab is facing selling pressure from FIIs. Foreign investors have decreased exposure in Divi's Laboratories for three consecutive quarters now.

Shareholding Pattern of Divi's Lab

Qtr. Ending	20-Sep	20-Dec	21-Mar	21-Jun	21-Sep	21-Dec	22-Mar	22-Jun
FII	18.28	20.37	19.87	20.6	20.7	19.3	18.45	16.52

Source: Equitymaster

Update: The selling continued in the September 2022 quarter where FIIs again sold stake and brought their total exposure to 15.4%.

Check out the latest shareholding pattern of Divi's Lab.

How Divi's Lab has performed recently

Divi's Lab share price slumped 9% on 7 November 2022 after the company reported dismal Q2 results. The stock had opened the day on a flat note at Rs 3,736 against its previous close of Rs 3,745.

Divi's Lab has a 52-week high quote of Rs 5,091 touched on 9 November 2021 and a 52-week low quote of Rs 3,365 touched on 26 May 2022.

The company is just a couple of percentage points away from hitting a new 52-week low.

In 2022 so far, the stock has fallen 27%. In the past five days, it's down over 10%.

Take a look at the table below which compares Divi's Lab with its peers on various metrics for 2022 figures.

Comparative Analysis

Company	Divi's Lab	Alkem Labs	Biocon	Glenmark Pharma	Torrent Pharma
ROE (%)	28.2	21.0	12.5	12.3	13.2
ROCE (%)	35.1	18.7	9.9	14.2	14.4
Latest EPS (Rs)	112.7	109.2	5.9	29.3	23.6
TTM PE (x)	30.3	29.5	47.2	14.4	71.3
TTM Price to book (x)	7.5	4.4	4.0	1.3	9.3
Dividend yield (%)	1.0	1.1	0.2	0.6	2.9
Industry PE (x)	35.9
Industry PB (x)	3.5

Data Source: Ace Equity, Equitymaster

About Divi's Laboratories

Divi's Lab is a leading manufacturer of APIs (Active pharmaceuticals ingredients), intermediates, and registered starting materials in India.

The company has been operating for more than thirty years in Hyderabad, India. It's among the top pharmaceutical companies in the country.

It has over 14,000 highly trained professionals across departments and 350 scientists that work together to bring world-class products to customers.

For more details about the company, you can have a look at Divi's Laboratories' factsheet and Divi's Laboratories' quarterly results on our website.

You can also compare Divi's Laboratories with its peers.

Divi's Laboratories vs Abbott India

Divi's Laboratories vs Sun Pharmaceuticals

Divi's Laboratories vs Aurobindo Pharma

Divi's Laboratories vs Cipla

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...