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Target: ₹3,330
CMP: ₹3,486
Divi’s Laboratories Q2-YF24 earnings were below our expectation. While revenue was in line with estimates, profitability was lower than expectation, partly due to lower pricing in the generic API segment. We reduce our earnings estimate by 5/3 per cent for FY24/FY25, factoring in increased competition in the API segment and higher tax rate, partly offset by improved growth momentum in the Nutraceutical business. We value DIVI at 35x 12M forward earnings to arrive at a price target of ₹3,330.
Management comments: While volume growth was robust in the generics segment, the pricing pressure negatively impacted YoY sales growth of this segment; the nutraceutical sales were ₹200 crore during the quarter, up 11 per cent YoY; and the commercial benefits from the two major CS projects are anticipated to materialise starting H2-FY24 onwards.
We are building 25 per cent earnings CAGR 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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