Divis Labs is Down by 35% Why?

3 min read

Divis Laboratories a pharma giant giving a phenomenal performance over the past years with revenue growth of 21.9% and 17.13% in 3 years and 5 years and profit had also grown by 29.83% and 22.79% in 3 and 5 years respectively. The stock price was at an all-time high on 14th October 2021 (Rs 5373) with the highest ever PE of 70 but a significant correction of 35% was recorded in stock in the last 1 year with PE declining to around 39. What is the reason for such a huge correction?  Let’s understand the same.

There are Four main reasons the stock was down by 35% in the last 1 year:

Fall of revenue

  1. Reduction of sales of Molnupiravir: Divis is API (Active Pharmaceutical Ingredient) manufacturer and an export-driven company. Divis was manufacturing a covid related drug molnupiravir which had the highest demand during the covid wave. However, post-Q4FY22 the revenue of the molnupiravir started to decline as the covid cases had reduced hence the demand for the drug went south impacting the revenue of the company.
  2. Reduced Demand for Custom Synthesis.: Company is in the business of Customs Synthesis and generates significant revenue from this segment. In this segment, the company manufactures the drugs that are required in the clinical which are in small quantities. As the drug requirement is lower due to clinical trials hence the company generates good revenue and margins on the same. During the covid wave, the company had got huge contracts for the same resulting in a rise in revenue from the segment. However, as the covid cases reduced the demand for fast-track projects had gone down hampering the revenue and margins of the company.
  • Impact on Margins: The margins had good traction during the covid phase. The margins had gone above the industrial standards. However, the margins had corrected significantly post Q4FY22 as the sales of covid related product molnupiravir and revenue from the custom synthesis started to decrease. Post commencement of the Russia-Ukraine war and frequent lockdowns in China due to covid zero policy the cost of raw materials, freight costs, fuel costs and logistic costs due to supply chain disruptions had increased resulting in erosions of margins.
  • Delay in New Projects: Company is planning to do a huge green field CAPEX at Kakinada, Andra Pradesh in a total area of 425 acres. The CAPEX amounts to Rs 1000-2000 crores. The company is doing such a huge CAPEX because the company can unlock great opportunities with drugs worth $20 billion that will go off patents. The company are facing various challenges to kick start the project since 2015 from the acquisition of the land to the approval of various regulatory authorities. The locals are also protesting against the company as the plant will pollute the land, water and air and also State Government is not giving the approval for the same. Due to these issues the company cannot start the projects.

Future Outlook:

The next 2-3 quarters may be flat for the company due to the global slowdown, an increase in interest rates and higher crude oil prices may reduce the demand as the big pharma companies will reduce spending with the rise in the cost of capital. However, with a huge correction in prices and reduced valuations, there is plenty of growth in the company in the coming years driven by the robust business model.

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