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CS momentum intact; generic weakness and high opex weigh on results

CS platform expansion to help sustain earnings growth

• Divi’s Laboratories (DIVI) posted lower-than-expected financial performance in 1QFY26. Revenue/EBITDA/PAT came in 5%/14%/18% below our estimates, affected by lower traction in the generics segment and increased opex. Having said this, 1QFY26 was the seventh consecutive quarter of robust YoY growth in earnings.
• Custom synthesis business has been witnessing strong growth momentum, driven by robust engagement across clinical phases and at the commercial stage. DIVI continues to build technology platforms (flow chemistry/ peptides/biocatalysis/ADCs) and add capacities to support manufacturing requirements for innovator customers.
• DIVI is making efforts to sustain market share in the generics API space. It is also working on the manufacturing value chain to keep profitability intact.
• We cut our earnings estimates by 8%/6% for FY26/FY27, factoring in a) the current pricing pressure in the generics segment, b) incremental opex related to new projects, and c) revenue being back-ended. We value DIVI at 54x 12M forward earnings to arrive at a TP of INR6,320.
• We estimate a 20% earnings CAGR over FY25-27 on the back of improved business prospects in the CS segment as certain contracts are currently undergoing pilot study/qualification and subsequently expected to scale up to the commercial level. Notably, Peptide is expected to be the next breakthrough opportunity for DIVI. However, the current valuation leaves limited upside; hence, we maintain Neutral stance on the stock.

14% CC YoY revenue growth and margin expansion drive YoY earnings growth

• Revenue grew 13.8% YoY to INR24b (our est: INR25.2b) for the quarter.
• The generics:CS ratio was 47:53. This implies 3%/18% YoY growth in generics/ CS sales. The CC YoY growth in total revenue was 14%.
• Nutraceutical revenue was INR2.5b, up 40% YoY.
• Gross margin expanded 60bp YoY to 60.3%.
• EBITDA margin expanded 90bp YoY to 30.2% (est. 33.5%), aided by a better product mix and marginally better operating leverage. Lower other expenses (down 60bp YoY as % of sales) were partly offset by higher employee costs (+30bp YoY as % of sales)
• As a result, EBITDA grew 17% YoY to INR7.3b (est. INR8.5b).
• Adjusted for forex gains of INR390m, PAT grew 20% YoY to INR5.2b (est. INR6.3b).

Highlights from the management commentary

• The Kakinada backward integration project has started reflecting in DIVI’s gross margins. DIVI is also shifting certain KSMs and intermediates from Unit-I/II to the Kakinada site to utilize the cGMP capacity of Unit I/II.
• DIVI is on track for three major projects with a total investment of INR20b. The business from these projects is related to molecules just commercialized by innovator and certain molecules that have finished clinical trials and are ready for commercialization.
• DIVI is working on biocatalysis with certain projects on a pilot scale with innovators.
• The capital work in progress was INR14b at the end of Jun’25.
• The gadolinium-based contrast media project is undergoing pilot study and qualification. It would take about 18 months to witness commercial benefits from this project.
• Overall capacity utilization was ~80%.
• The commercial-level solid-state peptide capacity is available with DIVI based on the customer requirement.
• While there has been pricing pressure in the generics segment, DIVI has been able to offset this impact due to backward integration and leading volume market share in certain products.

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