Divi's Labs stock tanks 12% on big miss in Q3; near-term trend 'bearish'

Analysts' average price target of Rs 3,862, however, indicates significant upside. The near-term trend remains bearish

Underwhelming October-December quarter (Q3FY23) numbers led to a major sell-off in the Divi’s Laboratories (Divi’s) stock. Revenue, profit, and margin -- all witnessed sharp reductions and were well below Street estimates. Analysts were already negative on the stock but the results were much poorer than the written-down estimates.

Divi’s consolidated net profit dropped 66 per cent to Rs 307 crore in Q3FY23, against Rs 902 crore in the year-ago quarter. Revenue from operations fell 31 per cent to Rs 1,707 crore in the quarter under review, against Rs 2,493 crore a year ago. Divi’s reported Ebitda of Rs 408 crore was about 62 per cent lower year-on-year (YoY) from Rs 1,097 crore. The margin tightened to 23.9 per cent from 44 per cent a year ago. 

For Q3, the consensus PAT estimate was Rs 505 crore, which is a big miss; revenue was expected to be around Rs 2,000 crore. The nine-month PAT declined 27 per cent to Rs 1,502 crore, against Rs 2,066 crore for the same period in the previous year, and revenues dropped to Rs 6,099 crore versus Rs 6,503 crore.

The YoY revenue decline in Q3 was expected due to the slowdown in Molnupiravir sales as Covid cases declined. But non-Covid sales were expected to see overall growth at 23 per cent and generic API and nutraceutical sales were expected to grow 20 per cent YoY and 15 per cent YoY, respectively. The Ebitda margin was expected to reach 36.5 per cent. All those targets were missed.

Material consumption was around 43 per cent of revenue, a drop of 33 per cent due to changes in the product mix. Total expenses decreased by 6.09 per cent YoY to Rs 1,386.30 crore in Q3. The cost of materials consumed was at Rs 604.40 crore and employee benefit expenses stood at Rs 238.88 crore (down 2.35 per cent YoY).

The stock was weak in the first-half of FY23. It dropped 12 per cent to Rs 2,875 after Q3 results were reported on Friday. 

It has lost 32 per cent in the last 12 months; it has (including Friday’s fall) lost over 15 per cent in the past month. The technical trends are bearish, indicating that the stock may fall further in the near term. The support near the 52-week low (Rs 2,795) is critical -- the stock bounced from those levels on Friday. If this is breached by selling and the price falls below Rs 2,835, the stock may slide quite a lot further, until the Rs 2,550 level. On the upside, Rs 3,300 will see a major resistance.

However, analysts’ consensus is that Divi's has an average price-target/fair value of Rs 3,862 and the consensus estimate represents a significant upside from the current levels.