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Morgan Stanley has initiated coverage on drugmaker Divi's Laboratories with an underweight rating, citing rich valuations on the stock.

The firm gave a price target of Rs 3,053 on the stock, implying a potential downside of 11 percent from Thursday's closing price.

Divi's Laboratories is among the worst performers on the Nifty 50 index, having declined over 30 percent on a year-to-date basis.

Morgan Stanley called Divi's as a company engaged in a strong business but currently going through a lean phase, even as the stock has delivered strong shareholder returns over the last several years. Shares have gained 220 percent over the last five years.

Divi's is also witnessing slow Earnings Per Share (EPS) growth compared to its peers and also slower than its historical trends, according to Morgan Stanley.

At 38.8 times current financial year EPS and 34.3 times next financial year EPS, Morgan Stanley finds Divi's valuations to be rich. Citing all of the above factors, the brokerage expects the company to underperform its peers going forward.

Among the positives, Morgan Stanley cited that Divi's is running a cash-rich balance sheet with Rs 3,340 crore of cash as of the September quarter. At 24-25 percent Return on Equity, it called Divi's a capital-efficient business.

Post its quarterly earnings, ICICI Direct downgraded Divi's Laboratories downgraded the stock to hold from buy with a price target of Rs 3,865.

Shares of Divi's Laboratories are trading 1.7 percent lower at Rs 3,351.5.

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First Published:Dec 2, 2022 12:03 PM IST