The drug manufacturing giant is keen on investments in efficiency and new range of products.

Earnings Results Q1 FY23

Divi’s Laboratories reported a profit of Rs 702 crore which is 26 percent year-on-year growth in the consolidated profit for the first quarter of the current financial year. The company has posted weak numbers in the operating incomes and the profit was manipulated by Other Income. The stock plummeted almost 6 percent on Friday after posting the results.

The company’s other income was posted at Rs 88 crore which is up by 146 percent in comparison with the same quarter of the last year, however, the tax costs have fallen by 42 percent to Rs 149 crore during the same period.

The EBIDTA margins have fallen by 630 basis points mainly due to a shortfall in gross margins and increase in other expenses. EBIDTA margin was 35 percent.

Gross profit for the quarter was affected due to the lesser contributions from the high-margin custom synthesis business as well as high raw material inflation.

Strengths

The balance sheet of the company is very healthy, roughly having Rs 3400 liquidity in their books. Hence the company is prepared for the future investments. Additionally, the company has 350 acres of unused land with infrastructure for future opportunities.

Currently, the company has 6 industrial manufacturing units at Hyderabad and Vishakhapatnam.

Since 2018, The company has invested more than Rs 2500 crores in newer technologies, enhancement & upgradation of plants and processes, as well as yield improvement. All this has resulted in doubling the fixed assets, mainly plant machinery and equipment. Currently the company has a capacity utilization of 80 to 85 percent which provides enough head start for near-term growth.

Regarding APIs, about 16 products are under development and expected to gain traction as these products go off-patent in the next 2-5 years.

The company is focused on green chemistry which helps them to minimize wastage through technology, which in turn leads to higher profitability. Green chemistry has also helped to contain impurity levels.

Technicals

Let us look at the technical analysis for Divislab:

The weekly MFI is at 18 which tells us the stock is highly oversold and extremely cheap. The stock has taken support at the 38.2% retracement level. The stock has been rarely below the 200 Days Moving Average. Buying the stock when the prices approach the Moving Average is a good timing, as the price bounces back.

Outlook

The stock has corrected by over 30 percent since October 2021. Although the valuations are expensive in comparison to the pharma sector, investors can accumulate the stock as much due to its weak phase. Investors should focus on the long growth runway ahead of the company as the benefit from investment in productivity, the new product range, and green chemistry unfolds. Divi’s Lab is an excellent and a “star” company which benefits from the economies of scale, vertical integration and pricing power.

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