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Divis Laboratories reported quarterly numbers below estimations. Revenue at INR 21,180 million was up 19.1% YoY and down 8.0% QoQ, driven by a decline in the Custom Synthesis business. The constant currency growth stood at 18%. EBITDA saw robust growth of 23.4% YoY but declined 14.9% QoQ to INR 6,220 million, with an EBITDA margin of 29.4%, expanding 102 bps YoY but declining 237 bps QoQ due to increased material costs. The product mix for generics to custom synthesis was reported at 51% and 49%. Exports for the quarter is about 86%, and exports to the US and Europe is about 70%.

* Custom Synthesis (49% of revenue): The Custom Synthesis segment is advancing with several new projects across all clinical phases, including phase 2 and phase 3 molecules. Existing major commercial projects with big pharma continue to yield positive results. The company is also experiencing a lot of inquiries from US and European clients for CDMO. Additionally, the company has several products in the pipeline that are coming off patent, for which it has filed DMFs. The company also is actively producing peptide building blocks, demonstrating a strategic focus on creating this specialist portfolio. This is especially relevant for emerging anti-diabetic and anti-obesity drugs, showcasing a strategic focus on developing this specialized portfolio.

* Generic (51% of revenue): The company is experiencing stable demand for most of its established generics, which balances the pricing pressure on the product mix. Emerging generic products continue to gain market share, and future generics with filings planned for completion in the next few months will be commercialized in FY26. For all the future generics being filed right now, which are going to come off patents in 2025, 2026, and 2027, all are completely backward integrated. This integration helps the company control impurity profiles, thereby avoiding regulatory issues in the future. Capacity expansions in different compounds are anticipated to propel this growth.

* Margin performance: Despite a marginal reduction in the gross margin, the company’s EBITDA margin increased by 102bps YoY, driven by a further decrease in operating and manufacturing expenses. The company remains optimistic about expanding and not losing any volume gain, even with the short-term effects of the Red Sea Crisis on supply chain and logistical expenses. It is anticipated that the margin will increase in the future.

* Outlook & Valuation: We continue to have a positive view about Divi's Lab because of the following: 1) Major projects from large pharmaceutical companies are driving the growth in the custom synthesis business; 2) due to backward integration and the normalization of raw material prices, double-digit growth in the top line and margin expansion is anticipated; 3) capacity expansion for the commercial supply of new products; and 4) a good growth expected in the nutraceuticals segment. We value the stock based on the SOTP valuation strategy on FY26E and arrive at a target price of INR 5,000 and recommend BUY rating on the stock.

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