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Target: ₹3,430
CMP: ₹3,709.45
The operational performance of Divi’s Laboratories (DIVI) missed our estimates marginally in 1QFY24, due to lower sales in generics and custom synthesis. However, EBITDA margin expanded sequentially owing to lower raw material/logistics costs.
We reduce our earnings estimates for FY24/FY25 by 3/5 per cent to account for a gradual off-take in custom synthesis/nutraceutical sales in the near term and extended benefits of cost management activities. We value Divi’s at 35x 12M forward earnings to arrive at a target price of ₹3,430.
Divi’s continued to add capacity for product development/manufacturing and strengthen its capability in the contrast media space as one of the key levers of growth over the next 3-5 years. Further, being a leader in the core generic portfolio with the lowest cost, DIVI is in a good stead to see better growth than the market in respective molecules.
However, we maintain our Neutral rating as we believe the valuation adequately factors in the earnings upside over the next two years. It is trading at 15 per cent/48 per cent premium to its 5- year/10-year average PE multiple.
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