Brokerage firm BoFA Securities sees a potential 11 percent downside on drugmaker Divi's Laboratories as it downgraded the stock to underperform from the earlier rating of neutral. The brokerage also cut its price target on the stock by nearly Rs 1,400 to Rs 3,150 from Rs 4,550 earlier.

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BoFA has cited a slower-than-expected pace of margin recovery as the key factor behind the downgrade.

The firm wrote in its note that while the new custom synthesis (CSM) projects do give hope of a recovery in margin during financial year 2024, the pace could be slower-than-anticipated. Additionally, the downside risk to margin has not been factored into the stock's peak valuations, according to BoFA.

Post an 8.5 percent surge over the last one month, shares of Divi's Laboratories are trading at 56 times financial year 2024 price-to-earnings.

The brokerage expects margin for financial year 2024 and 2025 at 30 percent and 33 percent respectively, with a slow ramp-up anticipated after a muted first half of the year. For the first six months of the current financial year, BoFA expects Divi's margin to range between 25-28 percent.

This is the second bearish call received by the Hyderabad-based drugmaker in the last two days. On Tuesday, Kotak Institutional Equities reiterated its sell rating on the stock with a price target of Rs 2,600.

Similar to BoFA, Kotak also highlighted concerns over Divi's Custom Synthesis (CSM) segment, calling it a 'black box.' The brokerage said that unlike its global peers in this segment, there is absence of guidance, lack of disclosures on order books as well as active projects, exact delivery model and customer count.

Kotak is expecting a potential downside of 27 percent on the drugmaker on these concerns. Out of the 25 analysts that track Divi's laboratories, 10 of them have a sell rating, seven have a hold, while eight of them have a buy recommendation.

Shares of Divi's Laboratories are trading 0.65 percent lower at Rs 3,553.