Divi’s Laboratories results reported weak EBITDA margins in Q1FY23

Divi’s Laboratories Limited is an Indian multinational pharmaceutical company and producer of active pharmaceutical ingredients (APIs) and intermediates headquartered in Hyderabad, Telangana, India. Generic APIs and intermediates are manufactured and specially synthesised by the company. The company has extensive ties to major worldwide pharmaceutical companies in the CS sector, and it holds a substantial market share in the generics sector for items like Naproxen, Dextromethorphan, and Gabapentin, among others

In terms of generic naproxen, dextromethorphan, and gabapentin APIs, Divi’s Laboratories holds between 60 and 85% of the global market. The company presently holds between 20-30% of the global market share for both methylamine APIs and pregabalin.

Divi’s Laboratories on 12^th August announced their Q1FY23 results, where they reported a low double digit YoY growth in top line but failed to meet margin expectations. The reason was that they witnessed an increase in raw materials, shipping, power, and fuel cost, resulting in heavy pressure on margins. On the stock exchange, Divi’s Laboratories share price fell by 5.5% on the day Q1FY23 results were announced. So, let’s analyse their Q1FY23 results in deeper details..

Key Highlights of Divi’s Laboratories Q1FY23 results

• Consolidated revenue from operations in Q1FY23 grew by 15% to Rs 2,254 crore, while QoQ it fell 10%
• Divi’s Laboratories reported a 26% YoY growth in consolidated profit at Rs 702 crore for Q1FY23, while QoQ it fell 5%
• The company’s other income came in at Rs 4 crore, up 146% over the Rs crores in Q1FY22, but tax costs fell 42% to Rs 149.3 crore during the same period.
• On the operating front, EBITDA fell 0.6% YoY to Rs 846.70 crore during the Q1FY23, and margin contracted to 37.55 percent in Q1FY23, down 5.9% compared to 43.45% in
• Forex gain for the current quarter amounted to Rs 56 crore as against a gain of Rs 20 crore during the corresponding quarter of the last year

Divi’s Laboratories results Q1FY23

Divi’s Laboratories reported a 26% YoY growth in consolidated profit at Rs 702 crore for Q1FY23 from Rs 557 crores in Q1FY22, largely driven by other income and lower tax costs. However, operating performance was weak.

Consolidated revenue from operations in Q1FY23 grew by 15% to Rs 2,254 crores compared to Rs crores in Q1FY22. The company’s other income came in at Rs 88.4 crore, up 146% over the Rs crores in Q1FY22, but tax costs fell 42% to Rs 149.3 crore during the same period.

Divis’ witnessed industry wide inflation in raw materials and solvents (up 50-60%). Logistics challenges are also affecting operations with stretched timelines while freight cost continues to be high. Higher energy (power and fuel) cost has also impacted margins. While some stability is being seen in cost, pricing remains volatile in raw material and solvents with Divis trying to take advantage in case of any dip in inflationary environment.

You may also like: Cipla quarterly results of q1Ffy23 

Divi’s Laboratories results Q1FY23: EBITDA and EBITDA margin contract

On the operating front, EBITDA fell 0.6% YoY to Rs 846.70 crore during the Q1FY23, and margin contracted to 37.55% in Q1FY23, down 5.9% compared to 43.45% in Q1FY22.

“Forex gain for the current quarter amounted to Rs 56 crore as against a gain of Rs 20 crore during the corresponding quarter of the last year,” Divi’s Labs said in its BSE filing.

Divi’s Laboratories results Q1FY23: Capex Plans for FY23-25

More than the quarterly performance, the important narrative for Divi’s is its unprecedented capex plans to further augment capacities besides preparing for growing opportunities arising due to China plus one factor.

The company has been building capacity in a few more niche APIs as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities and upcoming opportunity size of US$20 billion in molecules going off-patent over FY23-25. Moreover, progress is going on towards six identified growth areas: Established generics, Existing generics, new generics, Sartan APIs, Contrast Media, Custom Synthesis.

Further, commercialisation of new API and multipurpose facility for custom synthesis and progress on new DMF filings & contrast media APIs is going on. Progress on Kakinada greenfield project planned outlay Rs 1000-2000 crore is also moving ahead.

Technical Analysis of Divi’s Laboratories share price

Divi’s Laboratories shares was one of the multibagger stocks in the last few years. Despite being in the midst of a sell-off over the past year, this multibagger stock has returned about 400% to its stockholders over the last five years. The stock has increased from about 700 to 3,460 per share over this time. However, for the past three months, this multibagger pharmaceutical stock has been trading sideways.

The Divi’s stock has gone down by 5.5% on the day of announcement of results and almost by 10% till now post results. It has reached its 52 weeks low of 3365 in May 2022 and is currently trading close to those levels. Yet brokers believe that stock still carries some untapped potential, which makes them to rate it with a Target price of more than 4000 levels.

Brokerage firm Prabhudas Lilladher said, “Divi’s Laboratories (DIVI) registered healthy revenue growth however profitability was impacted due to higher COGS and overheads along with change in product mix. We believe efforts on backward integration, debottlenecking and utility upgradation will continue to yield better margins,” and thus put a rating to Accumulate with a target price of 4140.

ICICI direct maintained their BUY rating as they believe that the company remains a compelling bet as a structurally well positioned customs synthesis and API company, even after a possible flattish year ahead on a high base in FY22 while some near-term margin pressure is transitory in nature.

Our view

The brokerages have also added that the company is operating at 80-85% of capacity utilization and still large capacity is available for additional future demand.

The verdict on the Univest App says that Divi’s Laboratories has strong fundamentals, yet it is on a bearish trend in both short as well as long term time frames. Therefore, investors are suggested to take an exit at the current level. A fresh entry based on the future prospects of the company should be taken when the short term indicators turn bullish on the Univest app.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

You may also like: Aurobindo Pharma Q1FY23 results