Target: ₹3,890
CMP: ₹5,893.80
Divi’s Laboratories -Q2FY24 revenue came in better than our estimates but EBITDA margin was lower. As a result, revenue was 8 per cent ahead of our estimates and EBITDA 6 per cent. Management commentary suggests revenue growth at 22.5 per cent y-o-y came in more from the custom synthesis part of the business as pricing pressures continue on the generics side. DIVI business inherently has seen fluctuations; we do not see over 20 per cent as a sustainable rate of growth; low base will likely help reported growth numbers for one more quarter in Q3; we expect a significantly lower growth rate starting from Q4FY25.
We continue to believe the narrative around the BioSecure Act has overheated the stock. We raise our core EPS estimates by 2-3 per cent during for FY25-27. The stock trades at 70.6x FY26E core P/E. We reiterate Sell and raise our target price from ₹3,288 to ₹3,890 based on 37x (from 39x FY26) FY27 core P/E plus cash per share as we roll over to FY27.
Any large product opportunity in custom synthesis is a key upside risk to our call and estimates.