Divi's Laboratories faces price target cuts after lowest ever operating margin

The management, during the earnings call attributed the fall in margin to higher tax rates and a change in product mix. Business was also impacted due to pricing pressure in the generic compounds.

Morgan Stanley has maintained its "underweight" eating on the stock and cut its price target to Rs. 2,766.

The firm says that the core margin of Divi's has eroded considerably due to a broad-based price erosion in the generic business and input cost pressures and that this may take time to recover.

Divi's Earnings per Share estimate over financial year 2023-2025 have been cut by 17.4 percent, 12.3 percent and 6.9 percent until financial year 2023-2025.

Morgan Stanley also called Divi's current valuations of 33.4x financial year 2024 earnings and 27.6x financial year 2025 earnings as "expensive."

InCred has also maintained its reduce rating on the stock and cut its price target to Rs 2,218 from the earlier Rs 2,395. The brokerage said that it would have been prudent on part of the company to guide the market on supplies of Molnupiravir.

The firm reduced Divi's core earnings estimate by 17-20 percent over financial year 2023-2025 and expects at least a further 20 percent downside on the stock.

InCred also has the lowest price target on the street for Divi's Laboratories.

Jefferies believes that Divi's margin should improve on a sequential basis as input cost pressures ease but growth levers will kick in only from the next financial year. The brokerage has also cut its EPS estimate by 10-17 percent over financial year 2023-2025. It has maintained its underperform rating on the stock and cut its price target to Rs 2,550 per share.

Motilal Oswal has maintained its neutral rating on Divi's but cut its price target of Rs 2,620. It has also cut its EPS expectations between financial year 2023-2025 by 21-33 percent to factor in the adverse impact on API prices due to increased competition, increased raw material cost, and a slower-than-expected pick-up in non-Covid CRAMS project.

It remains neutral on the stock considering the near-term headwinds on profitability and the moderate earnings outlook.

Out of the 25 analysts that track Divi's Laboratories, eight analysts each have a buy and hold recommendation, while nine have a sell rating. Shares of Divi's Laboratories have declined 38 percent from their peak of Rs 4,640.