Divi’s Laboratories Limited is an Indian multinational pharmaceutical company and producer of active pharmaceutical ingredients (APIs) and intermediates. The company is headquartered in Hyderabad. The company manufactures and custom synthesizes generic APIs, intermediates. The company also manufactures and supplies nutraceutical ingredients through its subsidiary named Divi’s Nutraceuticals.
Divis’ Laboratories has a big footing in exports. It has a market presence in 95 countries and about 14,000 employees and is one of the leading pharmaceutical companies in the world.
Quarterly Earnings Walkthrough
Divi’s Laboratories reported a consolidated profit of Rs 307 crore in the December which represents a steep fall of 66 percent year on year and 38 percent sequentially. The decline was majorly impacted by a poor output in the company’s top-line and disappointing operating performance.
The consolidated revenue from operations was reported at Rs 1,708 crore which is down by 31 percent compared to the corresponding period in the previous year. The sequential decline in the company’s top-line was at 8 percent.
The management plans to deploy capital to modernise legacy plants for enhanced productivity.
API segment under distress
The sales through the custom synthesis segment were at 40 percent in the December quarter. It is a substantial decline from 60 percent of sales in the December quarter of the previous year. The major reason for this decline is the poor sales of the high-margin Molnupiravir as the requirements arising out of the COVID pandemic have dissolved.
Additionally, the generic API segment is facing destocking and heavy competition which is causing a sharp fall in prices. Unfortunately for the pharma industry, the prices of raw materials have not fallen. Prices of metal-based raw materials like iodine and lithium have jumped up which is causing a shrinkage in gross margin. Along with the steep fall in operating deleverage, the EBITDA margins have dropped 24 percent as compared with 40 percent during the COVID phase.
Green flag for Kakinada plant
Divi’s Laboratories has received government clearances for the Kakinada plant site. The company has planned to invest Rs 1,000 crore for the primary phase of expansion targeting key starting materials, APIs and intermediates. The capital work in progress is for Rs 575 crore during the current fiscal year, an investment of Rs 275 crore has already been capitalized. A capital of about Rs 900 crore was deployed in the last financial year.
Most of the on-going investments are being deployed for the purposes of production capabilities for new generic molecules which are non-patent, contrast media molecule investments, and Sartans. The company is working on HiPo (highly potent) conjugate drug-related technology, continuous flow chemistry, photochemistry and peptide chemistry.
Divi’s Laboratories stock price has been facing tremendous selling pressure since December 2021. The stock has corrected down to its 50% retracement level and the price has broken the level. However, the big gap formed during August 2020, which is marked by the yellow box and line, has been filled as the stock crashed 15% after the declaration of results and by another 3.7% on the following day. The target for Divislab is the 61.8% retracement level at Rs 2401.
The MFI is at 13 points on the weekly chart which makes the stock extremely oversold and very attractive. The price is trading below the 200-day exponential moving average and thus it indicates that the stock price is currently very cheap. The company will need a few quarters to get back to its performance before the COVID pandemic. The pharma sector may be facing problems but investors must remember to buy the fear and sell the greed.
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