Divi's Labs: Downgrade cycle over! BofA upgrades stock to Buy, shares target price

BofA Securities has upgraded Divi's Laboratories Ltd (Divi's Labs) to 'Buy' from 'Underperform' with a revised target price of Rs 4,025 against Rs 3,380 earlier, as it feels a likely bottoming of margin in near-term and relative valuation provide an attractive entry point.

BofA Securities said Divi's two-year earnings downgrade cycle and margin decline to below pre-Covid levels is reflected in its underperformance, as the stock is down 8 per cent in 2024 so far against a 12 per cent rise in the Healthcare Index.

The API pricing pressure led to Divi’s margins declining to 27 per cent against  35 per cent pre-Covid. The end of destocking cycle & peer commentary seems to suggest bottoming-out of margins in the near-term, it said.

"We believe weak API pricing is factored into Street earnings post the downgrade with visible levers for earning growth aided by investment in capacity & capabilities. We see lower risk to the 35 per cent earnings growth over FY25-26 with valuation for Divi's at 35.5 times FY26 P/E appearing more compelling against large peers," it said.

US generic peers traded at 53 per cent premium over 2018-22. This premium, BofA said, narrows to 15 per cent in FY26 PE that factors full year upside from its growth drivers).

"While Divi’s earning recovery is getting closer, risks to outlook for US Gx and domestic stocks are not factored in their valuations. We upgrade the stock to Buy with a revised price target of Rs 4025 based 40 times PE, given improving earnings outlook," BofA said.