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Divis Laboratories reported robust quarterly numbers which were above estimations.
Revenue at INR 23,380mn was up 22.5% YoY and 10.4% QoQ, driven by growth in the
Custom Synthesis business, which saw an increased demand from current and potential
customers. The constant currency growth stood at 21%. EBITDA saw robust growth of
49.5% YoY and 15.1% QoQ to INR 7,160mn, with an EBITDA margin of 30.6%, expanding
553bps YoY and 126bps QoQ due to stability in the material costs. The product mix for
generics to custom synthesis was reported at 49% and 51%. Exports for the quarter are
about 87%, and exports to the US and Europe are about 71%.

* Custom Synthesis (51% of revenue): The Custom Synthesis segment saw a significant
growth of 56.2% YoY and 14.9% QoQ, due to increasing demand from existing and new
potential customers. The company has also filed DMFs for several of its upcoming
products that are coming off patent. In keeping with its strategic focus on developing this
specialized portfolio, the company is also actively producing peptide building blocks. Divi's
is strengthening its standing as a reliable partner in complex and valuable chemicals in
addition to increasing its market share.

* Generic (49% of revenue): The generic saw a marginal decline of 2.4% YoY and growth of
1.7% QoQ, because of pricing pressure and industry-wide challenges, due expect it to
stabilize in the near future. The overall impact on the generic business was mitigated by
the continued success of the emerging generic product portfolio despite the market
challenges. There are significant generic products in the future pipeline that are moving
closer to regulatory approval and customer qualification in the US and Europe. Beginning
in 2026, these future generic products will begin to contribute to revenue. 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 reduction in the gross margin, the company’s EBITDA
margin increased by 126bps YoY, driven by a change in the product mix, stability in the
raw material prices, and benefit from backward integration. The management expects
geopolitical factors may impact the raw material prices but remains optimistic to improve
margins going forward.

* Outlook & Valuation: We continue to have a positive view of Divi's Lab because of the
following: 1) Backward integration and the normalization of raw material prices; 2)
capacity expansion for the commercial supply of new products; 3) growth in the base
business; and 4) major projects from large pharmaceutical companies are driving the
growth in the custom synthesis business. We have introduced FY27E and valued the stock
based on the SOTP valuation strategy on Sep-FY27E and arrived at a target price of INR
6,983 and recommend a BUY rating on the stock.

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