Accumulate Divi`s Laboratories Ltd for the Target Rs. 7,050 By Prabhudas Liladhar Capital Ltd
Peptides and CS to anchor future growth
Quick Pointers:
* Expecting GMs to be stable at 60%
* Three strategic projects to drive capex beyond Rs 20bn in FY26
Divi’s Laboratories (DIVI) Q2FY26 EBITDA was a beat; 7% above our estimates led by higher CS revenues. We expect margins to improve, led by better product mix and stable raw material prices. Mgmt. suggested that moderation of raw material prices, increasing RFP’s and commencement of some CDMO and contrast media contracts, will continue to aid revenues and margins. Our FY26E/FY27E EPS estimates broadly remain unchanged. We expect 20% EBITDA CAGR and 19% PAT CAGR over FY25-28E. At CMP, stock is trading at 53x Sept2027E EPS. We Maintain our ‘Accumulate’ rating with revised TP of Rs7,050/share, valuing at 55x Sept 2027E EPS.
* Revenue growth backed by higher CS segment: DIVI’s Q2FY26 revenues came in at Rs27.1bn (up 16% YoY); 5% above our estimates. Generic revenues came at Rs9.5bn; up ~8.8% YoY while Custom synthesis (CS) delivered growth of 23% YoY at Rs 15.2bn. In Q2FY26 overall exports stood at 90% and exports to EU and US stood at 74% of revenue. Product mix for generics and custom synthesis in Q2FY26 were at 44% and 56% of revenue. Nutraceutical business for Q2 was Rs2.4bn, up 6% YoY.
* EBITDA beat aided by better operating leverage: GM came at 60.5%; up 190 bps YoY (flat QoQ) in line with our estimates. Employee expenses grew by 16% YoY whereas other expenses were up 15% YoY. EBITDA came in at Rs 8.9bn up 24% YoY vs our estimate of Rs8.3bn. 7% beat to our estimates. OPM stood at 32.7%, up 210bps YoY and 250bps QoQ. There was a forex gain of Rs 630mn. PAT came in at Rs 6.9bn; up 35% YoY; vs our estimate of Rs 5.92bn.
* Key concall takeaways: Generic business: Contributed 44% of the mix in Q2FY26. Stable volumes across key APIs (naproxen, dextromethorphan, phenylephrine, carbidopa/levodopa). Facing ongoing pricing pressure, though no loss of customers or volumes. Backward integration is carried out at Kakinada Unit 3 which supports cost, competitiveness and margins. Pricing environment likely to stabilize over next few quarters. Volume growth steady (~7% YoY); price erosion offsets part of value growth. Nutraceuticals remain a steady contributor.
* Custom synthesis: Continued strong engagement and RFP inflows; several global innovators conducting site visits. Three major long-term projects under execution, backed by supply commitments. CS share rose to 56% of sales; highest ever. Three active projects progressing through validation and construction, expected to commercialize over next 1–2 years. Mix includes late life-cycle management, Phase 3 molecules, and flow chemistry/biocatalysis/green chemistry programs. Company noted a healthy pipeline with milestone-based revenue structure. Growth in near term to be driven by ongoing CS projects and peptide-related engagements. Not entering generic peptides currently focus remains on innovator contracts.
* Peptides: Strength in FMOC-protected amino acids offers cost and impurity control advantages. Developing di-, tri-, tetra-, octa-peptides for global innovators. Engaged in Phase 3 molecules, strong visibility for long-term pipeline. No purification of final drug products—focus remains on fragments/intermediates. Peptide capabilities expected to become a key growth engine in coming years.
* Kakinada unit: Six blocks completed, two more under construction. Backward integration freeing up capacity at older sites for new validations and filings. GMP qualification for API production to begin soon; regulatory filings planned in coming quarters. Large land bank (200–300 acres) available for future expansion.
* Capex: FY26 Capex to exceed earlier guidance of Rs 20bn, driven by new strategic projects. Investments spread across all three units; focus on technologies, sustainability, and client-driven capacity creation. Capex so far: Rs 15.5bn spent in H1FY26; Rs 2bn capitalized in Q2.
* Other: Asset base: Gross block ~Rs 80-85bn improving asset turns expected over next 1–2 years. Cash: Rs 34.6bn; Inventories Rs 34.3bn; Receivables Rs 26.1bn.
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