Neutral Divi's Laboratories Ltd For Target Rs.11,110 by Motilal Oswal Financial Services Ltd
Strong beat on our estimates; CS and generics drive earnings End-to-end peptide capabilities position DIVI as a partner of choice for innovators
* Divis Laboratories (DIVI) delivered a strong beat in 2Q, with revenue, EBITDA and PAT exceeding our estimates by 19%, 33% and 33%, respectively. Strong traction in generics as well as custom synthesis (CS) supported by currency tailwinds, led to an improvement in overall performance for the quarter.
* As a result, DIVI reported its highest-ever quarterly revenue/EBITDA/PAT in 2QFY27.
* The custom synthesis segment reported robust growth, driven by the supply of products in the validation phase with respect to three major capex programs highlighted earlier by management.
* Legacy expertise, supported by capacity build-up across the peptide manufacturing value chain, has led to multiple projects spanning clinical development through commercial-scale manufacturing.
* DIVI witnessed a sizeable increase in volume offtake in the generics segment, further accelerating the intensity of growth in 2QFY27.
* We raise our earnings estimates by 21%/19% for FY27/FY28 factoring in
1) an increased benefit from projects moving toward validation and commercialization
2) an improved outlook for both the generics and nutraceuticals segments
3) better operating leverage. We value DIVI at 65x 12M forward earnings to arrive at our TP of INR11,110.
* We expect a 23%/34%/33% CAGR in revenue/EBITDA/PAT over FY26-28. Considering
a) its scientific capabilities in peptides, contrast media, and generics segments
b) its commercial scale-level manufacturing capabilities/ capacities
c) efficient supply chain management for raw materials and finished goods, DIVI is well-placed to service large innovator customers and gain business in the CS segment.
* The stock valuation provides limited upside from the current levels and hence, we reiterate our Neutral rating on DIVI.
Robust revenue growth and favorable mix drive EBITDA beat
* Divis Lab’s revenues grew 35.4% YoY to INR36.7b (19% beat) for 2QFY27.
* The constant currency (CC) revenue growth for 1HFY27 was 17%.
* The Generics-to-CS share in revenue was 38:62 for 1HFY27. This implies that CS grew 54% YoY to INR23.4b and the generics segment grew 43% YoY to INR13.6b for the quarter. Nutraceutical sales were INR2.7b for 2QFY27.
* Gross margin expanded 740bp YoY to 68%.
* EBITDA margin expanded 990bp YoY to 42.6% (our est: 38%), mainly due to improved segmental mix, currency tailwinds, and operating leverage (employee costs/other expenses were down 100bp/150bp YoY as % of sales).
* EBITDA grew 76% YoY to INR15.6b (our est: INR11.7b) for 2QFY27.
* PAT grew 73% YoY to INR11b (33.5% beat).
Highlights from the management commentary
* Of the three major capex programs, one is close to commercialization. The other two are expected to be commercialized over the medium term.
* DIVI has several projects in the validation phase.
* Several peptide fragments are being validated. DIVI is expanding capacity by installing an SPPS line. DIVI indicated that it is working only on peptides for innovators and does not manufacture generics.
* DIVI is building manufacturing capabilities across the entire peptide value chain, from building blocks to dipeptides/tripeptides and large peptides. This enhances manufacturing flexibility and supports customer requirements.
* It is also advancing its flow chemistry platform through advanced technologies while simultaneously expanding its biocatalysis infrastructure, which is designed for ton-scale manufacturing.
* In the generics segment, the growth was largely driven by volume. Pricing pressure persists in certain product categories.
* Considering the ongoing geopolitical issues affecting transit times and freight costs, DIVI maintains 3M inventory coverage for critical materials, providing greater flexibility in production and planning.
* DIVI intends to be among the top three players globally in peptide synthesis capacity.
* The Capital Work In Progress (CWIP) stood at INR16.4b.
* DIVI guided for annual capex of INR20b (+/-20%).
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