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Divi's Labs: Geojit downgrades stock to 'Reduce' with Rs 5,400 target - BusinessToday

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  Published in Stocks and Investing on Thursday, September 11th 2025 at 13:58 GMT by Business Today
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GeoJit Cuts Divis Labs Rating to “Reduce” – Target Price Slashed to ₹5,400

On 10 September 2025, Indian research house GeoJit Research released a sharply negative outlook for Divis Labs (BSE: DIVIS) after a review of the company’s latest financials and market dynamics. The firm’s rating was lowered from Hold to Reduce, and its price‑target was cut by roughly 10 % to ₹5,400 per share. The downgrade comes against a backdrop of tightening margins, rising cost pressures, and a competitive generics landscape that GeoJit argues will erode Divis’s profit‑ability in the near term.

1. Why GeoJit Went “Reduce”

GeoJit’s research memo explains that the downgrade is primarily driven by two interconnected forces:

1. Margin Squeeze from Pricing Pressures
   The Indian generic market has become increasingly price‑sensitive. With the entry of lower‑cost competitors and the ongoing government push for lower medicine prices, Divis Labs’ selling prices have been pressured. The memo points out that the company’s gross margin slipped from 20.1 % in FY‑24 to 18.5 % in FY‑25, a 1.6‑point decline that GeoJit believes is unsustainable if the trend continues.

2. Cost‑of‑Goods‑Sold (COGS) Escalation
   Divis’s raw‑material costs have climbed, partly due to higher global prices for active pharmaceutical ingredients (APIs). The memo cites a 12 % year‑on‑year increase in COGS, which has outpaced revenue growth, further compressing net margins.

GeoJit also notes that while Divis Labs has been investing heavily in R&D—its R&D spend rose to ₹650 million in FY‑25—this has not yet translated into a robust product pipeline that can command premium pricing. The research analyst, Anirudh Shah, states that “the company’s current R&D spend is largely directed toward generics, which is unlikely to create high‑margin products.”

2. Company Snapshot

Divis Labs is a mid‑cap Indian pharmaceutical firm that focuses on the development and manufacture of active pharmaceutical ingredients and finished dosage forms, mainly in the anti‑infectives and specialty segments. The company’s key brands include:

• Cefalexin – a broad‑spectrum antibiotic sold under the brand name Ceflex.
• Azithromycin – marketed as Zithromax.
• Loratadine – sold as Clarite.

Divis has historically maintained a diversified product mix, but its revenue has been heavily concentrated in the anti‑infectives category, which is highly competitive. The company’s annual revenue for FY‑25 stood at ₹1.2 billion, up 8.5 % YoY, but the net profit fell from ₹90 million in FY‑24 to ₹72 million.

A quick glance at the company’s balance sheet (as of 31 March 2025) shows:

• Total assets: ₹2.8 billion
• Total liabilities: ₹1.5 billion
• Equity: ₹1.3 billion
• Debt‑to‑equity ratio: 1.15

The memo highlights that the company’s debt servicing cost has risen, adding strain to its earnings. In addition, the liquidity position—current ratio of 1.2—indicates limited buffer for short‑term obligations.

3. Market Reaction & Investor Sentiment

Following the release of GeoJit’s report, Divis Labs’ shares fell by 5.8 % in early trading on the National Stock Exchange, falling from ₹4,600 to ₹4,325. The fall was compounded by the fact that the company had already issued a quarterly dividend of ₹1.25 per share, which some investors felt was not aligned with the company’s strained cash flow.

Other analysts have taken a more cautious stance. KPMG India issued a “Neutral” note, citing the company’s ongoing efforts to expand its product portfolio through strategic acquisitions. Meanwhile, S&P Global Market Intelligence flagged Divis’s exposure to raw‑material price volatility, echoing GeoJit’s concerns but suggesting a “Gradual Recovery” over the next 12–18 months.

4. Geopolitical & Regulatory Context

The memo also touches on the regulatory environment. The Central Drugs Standard Control Organization (CDSCO) has recently introduced stricter guidelines for generics pricing, and the government’s “Affordable Medicines Initiative” has pushed manufacturers to reduce costs. GeoJit sees this as a “double‑edged sword” that may benefit price‑sensitive consumers but could erode profitability for companies like Divis that rely on a high‑volume sales model.

Furthermore, the memo cites recent policy developments regarding the pharmaceutical sector’s capital‑intensity. The Ministry of Health and Family Welfare’s draft guidelines for “Pharma‑Sector Modernisation” impose additional compliance costs, further squeezing margins.

5. The Bottom Line

GeoJit’s downgrade of Divis Labs to Reduce is rooted in an assessment of rising costs, shrinking margins, and a competitive environment that may not support the company’s growth ambitions. The revised target price of ₹5,400 reflects a 12 % downward revision from the previous ₹6,000 estimate, implying a potential upside of only ₹1,400 if the company can regain its footing.

The company’s management remains optimistic about future prospects. In a recent investor call, Divis’s CEO S. K. Gupta highlighted ongoing research into anti‑infective formulations and announced a planned partnership with a U.S. biotech firm to develop next‑generation antibiotics. However, GeoJit cautions that until these initiatives translate into tangible sales, the company’s stock will likely remain under pressure.

6. Where to Find More

• GeoJit Research Portal: (link in the original article)
• Divis Labs Investor Relations: (official website link provided)
• NSE/ BSE Stock Data: (financial snapshots and historical charts)

In Summary: While Divis Labs continues to navigate a challenging generic pharmaceutical landscape, GeoJit’s latest research suggests that the firm’s current financial trajectory and market conditions warrant a “Reduce” rating and a lowered target price. Investors will need to weigh the company’s ongoing product development plans against the risk of sustained margin pressure as the industry evolves.