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Custom Synthesis outperforms; API underperforms

Work-in-progress to improve prospects in peptide/contrast media space

* DIVI delivered a miss on 1QFY25 earnings performance, due to the ongoing pricing headwinds in API segment and muted Nutraceutical sales. The custom synthesis (CS) segment maintained strong growth momentum for this quarter as well.

* We largely maintain our estimates for FY25/FY26. We value DIVI at 43x 12M forward earnings to arrive at a TP of INR4,680.

* DIVI continues to make efforts to enhance its business prospects in peptide, contrast media and other niche segments within CS. Its consistent service at lab-scale and availability of manufacturing capability/capacity give impetus to innovator customers to have DIVI as a reliable supplier. The US Biosecure Act further provides a boost to Indian CMDO companies, including DIVI. The API business outlook remains muted due to ongoing price erosion, given the large inventory base at the industry level. The valuation adequately factors in the earnings upside at CMP. We maintain Neutral stance on the stock.

Operating leverage outweighs product mix impact on YoY basis

* Revenues grew 19% YoY to INR21.2b (our est: INR22b) for the quarter. CS revenue (51% of sales) grew 52% YoY, while API revenue (49% of sales) declined 3% on a YoY basis.

* Gross margin contracted 160bp YoY to 59.7% due to a change in the product mix.

* However, EBITDA margin expanded 100bp YoY to 29.4% (our est: 31%) largely due lower employee costs/other expenses (-100bp/160bp as % of sales), offset by lower gross margin.

* As a result, EBITDA grew 23.4% YoY to INR6.2b (our est: INR6.8b) for the quarter.

* Adjusted for INR10m in forex loss, PAT grew 20.3% YoY to INR4.3b (our est: INR5.1b).

Highlights from the management commentary

* Kakinada plant would be operational in 4QFY25. The meaningful commercial benefit is expect two years onward.

* Generic API prices are expected to stabilize in the next few quarters. DIVI is able to offset the pricing impact through higher volume offtake.

* Two reactors of 500L capacity will cater to peptide manufacturing (GLP1 products).

* Considering the share of generics/CS in 1Q revenue, the CS segment reported 52% YoY growth, while the generics API segment posted a 3% YoY decline.

* DIVI has commercial scale contracts for Iodine-based contrast media products. Gadolinium-based products are under clinical development.

* The overall capacity utilization is about 82%.

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