Why Divis Lab Share Price is Falling

A month ago, shares of Divi's Lab surged over 9% in a single day as the pharma major posted healthy export numbers for the month of March 2023.

The company's exports rose to US$92 million (m) in March against an average of US$55-60 m in the previous 11 months.

A 9% rally for a bluechip stock on a single day is rare.

Novice investors might have missed out on gains as this is a trend that keeps on repeating. In March 2022 too, export numbers shot up compared to the previous 11-month average.

Now, after a month, shares of Divi's Lab have started to decline, this time due to margin concerns, among other reasons.

Let's find out what the stock is under pressure.

#1 Margin contraction

In its latest concall, the company's management said that gross margins continue to remain under pressure due to one-time opportunities related to Covid drugs, pricing pressures on APIs, and an increase in raw material costs.

The reason for the poor share price performance of Divis? In the last twelve months the company has been facing pressure both on the topline as well as the bottomline front.

Going forward, it expects improvement in gross margin and profitability growth as raw material procurement and availability have been stabilized.

#2 Anticipation of a weak quarter

The stock market is forward-looking, and investors often base their decisions on future expectations rather than past performance alone.

If the company is anticipated to deliver a below-average performance in the fourth quarter, it suggests that its earnings are not expected to improve or may even deteriorate further.

The company's muted results over the past three quarters have likely eroded investor confidence.

There are also some pending regulatory clearances, at its Kakinada project, which have been delayed.

Strong growth prospects

While uncertainties prevail at its Kakinada facility right now, it should be ready for validation and regulatory approval in 2-3 years.

It's also looking to invest in capex towards new technologies such as vapor-phased chemistry, continuous flow chemistry, photochemistry, gadolinium compounds, and peptides.

If we take a look at the historical performance, you'll find rock solid stability and great financial discipline.

Barring a couple of years, both the company's topline as well as bottomline has grown with clockwork precision. The topline has grown 5x for the ten year period between FY12 and FY22 whereas the bottomline is up by an even more impressive 6x.

The company has been almost debt free for many years now.

A financial performance of this kind points to great execution by the management team and to the fact that they know exactly what they are doing and are dead sure about their long-term strategy.

Divis Lab currently trades at a TTM PE of almost 36x versus its five year average of 45x and industry average of 31x.

Have a look at the comparative analysis table below -

Comparative Analysis

Company	Divi's Lab	Biocon	Mankind Pharma	Piramal	Torrent Pharma
ROE (%)	28.2	9.8	26.7	6.1	13.2
ROCE (%)	35.1	8.3	33.9	7.1	14.4
Latest EPS (Rs)	90.3	3.2	35.8	3.2	24.6
TTM PE (x)	34.9	75.8	37.9	22.9	67.2
TTM Price to book (x)	6.7	3.1	5.2	1.3	8.8
Dividend yield (%)	0.9	0.2	0.0	1.4	2.9
Industry PE	31.9
Industry PB	3.5

Data Source: Ace Equity, Equitymaster

So there you go...these were the reasons why Divi's Lab share price is falling. It sure does have exciting growth plans for the next three years.

Before you go, also take a look at the below reasons which we highlighted in early 2023.

Why Divis Lab Share Price is Falling (February 2023)

Last year in November 2022, we wrote about why Divi's Lab share price was falling and how the company's weak growth guidance was dragging its share price.

Not much has changed since then. Last week, the company once again reported weak set of earnings for the quarter ended December 2022.

In the very next trading session, shares of the company hit new 52-week low of Rs 2,745.10 per share.

In the past five days, the stock has fallen 14% and in 2023 so far, the stock is down 15%.

Surely, weak quarterly results can't be the only reason why Divi's Lab is falling.

Let's find out if there are other reasons dragging the stock lower. But first, let's go through the company's recent results.

Divi's Labs Q3 results

For the quarter ended 31 December 2022, Divis Labs' total revenue stood at Rs 17.1 billion (bn). This is 8% lower compared on a sequential basis.

Even the net profit fell to Rs 3.1 bn, which is 38% lower on a sequential basis.

A greater sign of concern here is the fall in net profit margins. For the quarter ending 31 December 2022, the company's net profit margin took a hit of 8.6% on a sequential basis. The net profit margin for the period is 18%, a sharp decline from 26.6% in the previous quarter of the current financial year.

Despite falling expenses, the company's net profit margin has reduced.

Divi's Labs' quarterly performance has been continuously deteriorating for a while now. Since the beginning of the financial year 2022-23 the company has reported dull numbers.

Quarterly Performance of Divis Labs

Quarter Ending	Mar-22	Jun-22	Sep-22	Dec-22
Turnover (Rs in m)	25,708	23,429	19,346	18,219
Expenses (Rs in m)	14,140	14,078	12,335	12,994
Profit after tax (Rs in m)	8,946	7,020	4,936	3,068
Net profit margin (%)	35.5	31.1	26.6	18

Data Source: Equitymaster

Last year, the company reported robust results because of sales of the antiviral drug - Molnupiravir. Like all Indian pharmaceutical companies, the export figures of Divi's Labs shot through the roof owing to demand for Covid-19 related drugs and vaccinations.

The markets already expected a deteriorated set of quarterly results this year. But the company's quarterly numbers are even poorer than what the market was expecting.

Rahul Shah, Co-head of Research at Equitymaster predicted the effect in quarterly numbers in November 2022 itself.

In his editorial on how much more can Divi's labs fall, he wrote:

• "In fact, for the most recent quarter of September 2022, the company has reported a fall in profits to the tune of almost 20%. Things aren't looking all that great for the remainder of the year either. Most likely, the company will close the year with only a small growth in profits or perhaps flat growth.
  
  The recent performance has certainly not gone down well with investors. The stock has been taken to the cleaners, losing 35% from the top with perhaps more pain to come."

He further explained,

• "When a stock trades at 2x its long-term multiple, the growth juggernaut better be rolling and rolling fast. If there's even a small question mark over future growth, the price may come tumbling down in a matter of few months.
  
  And this is precisely what happened with the stock. Over the last few quarters, the annual growth in profits has been steadily coming down."

FIIs on a selling spree...

Along with weak results, continuous selling by FIIs has added insult to injury. In the quarter that ended in December 2022, FIIs sold 0.25% stake in the company.

FIIs have been divesting their stake from Divi's Lab for a long time now. In the past five quarters, FIIs have reduced their stake by more than 5.5%.

Divis Labs Shareholding Pattern

Quarter Ending	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
FII Holding (%)	20.7	19.3	18.0	17.0	15.0	15.0

Source: Equitymaster

How Divi's Lab has performed recently

Divi's Lab share price slumped 12% on 3 February 2022 after the company reported weak Q3 results. Today, the stock opened lower by 3% at Rs 2,824.4 against its previous close of Rs 2,884.5.

The company also hit its 52-week low of Rs 2,745.1 today.

Divi's Lab has a 52-week high of Rs 4,640.9 touched on 28 April 2022.

In 2023 so far, the stock has fallen 15%.

About Divis Labs

Divi's Lab is a leading manufacturer of APIs (Active pharmaceuticals ingredients), intermediates, and registered starting materials in India.

The company has been operating for more than thirty years in Hyderabad, India. It's among the top pharmaceutical companies in the country.

It has over 14,000 highly trained professionals across departments and 350 scientists that work together to bring world-class products to customers.

For more details about the company, you can have a look at Divi's Laboratories' factsheet and Divi's Laboratories' quarterly results on our website.

You can also compare Divi's Laboratories with its peers.

Divi's Laboratories vs Abbott India

Divi's Laboratories vs Sun Pharmaceuticals

Divi's Laboratories vs Aurobindo Pharma

Divi's Laboratories vs Cipla

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