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Concerns over ‘unsustainable’ growth have caused Divi’s Lab to drop 5%.

Despite a strong performance, Divi’s Laboratories Ltd plummeted about 5% to a near 13-month low on Tuesday, when analysts warned that the exceptional rise is unsustainable as the epidemic abated globally.

On the BSE, the stock plunged as low as Rs 3,676.85 per share, a low last touched on April 5, 2021, and fell as much as 5% from its previous closing. The stock was trading at Rs 3725 on the BSE at 9.40 a.m., down 4.42 percent from its previous close.

In the March quarter, Divi’s Lab’s net profit grew by 78 percent to Rs 895 crore, up from Rs 502 crore a year ago. Revenue from operations increased by 40% to Rs 2,518 crore from Rs 1,788 crore the previous year.

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“We believe that this anomalous growth was caused by Covid-led medications (as it was last quarter) and that it will be unsustainable in the future as the pandemic fades over the world, save in China. As a result, we expect weaker growth on a higher base. The inflationary environment, combined with a growth taper, would weigh on margin performance as well “In a letter to investors, BoB Capital stated.

“We trim our FY23-FY24 EBITDA expectations by 9-15 percent and lower our target EV/EBITDA multiple from 27x to 26x (implied P/E multiple of 37x) – in line with the five-year average multiple,” according to the BoB Capital research.

The stock has been downgraded from ‘buy’ to ‘hold,’ with the target price reduced to Rs 4,250 per share from Rs 5,250 previously.

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The custom synthesis business increased by 60% quarter over quarter, while generic APIs decreased by 66%. Due to lower other expenses/employee costs (-280bp/-180bp) as a percentage of sales, EBITDA margin increased by 380 basis points to 43.9 percent.

“We cut our FY23/FY24 EPS forecast by 11 percent/14 percent, owing to (a) fewer sales of COVID-related items due to the low number of cases globally, (b) a moderate upswing in growth in the generics category, and (c) a delay in the Kakinada capex implementation. To get at our target price of Rs 4,480, we value DIVI at 33 times 12-month forward earnings “In a note to investors, Motilal Oswal Research stated.

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