Neutral Divi’s Laboratories Ltd for the Target Rs. 6,925 by Motilal Oswal Financial Services Ltd
Operating leverage and CS strength support margins
Growth visibility intact, but upside priced in
? Divi’s Laboratories (DIVI) delivered better-than-expected performance in 2Q with a 4%/10%/10% beat on revenue/EBITDA/PAT. While gross margin has been steady for the past eight quarters, DIVI has delivered improved EBITDA margin YoY as well as QoQ, led by better operating leverage.
? Based on the generics and custom synthesis (CS) composition highlighted by the management, DIVI has achieved an all-time high quarterly revenue in the CS segment in 2QFY26.
? The generics business remained on a moderate YoY growth path. While pricing pressure persisted in this segment, DIVI was able to offset this impact through backward integration and higher volume offtake.
? The nutraceutical business has seen a notable uptick for the past two quarters.
? We broadly retain our FY26/FY27/FY28 estimates. We value DIVI at 55x 12M forward earnings to arrive at our TP of INR6,925. DIVI continues to strengthen its position as a reliable CDMO company for global pharma players, aided by 1) differentiated skill sets such as peptide and contrast media manufacturing, 2) enhanced reliability for supply despite geopolitical turmoil, and 3) a built capacity that would cater to future requirements.
? Further, it continues to focus on improving operating efficiency in manufacturing generics and adding new molecules in this segment. However, the current valuation adequately factors in the earnings upside. Reiterate Neutral.
Revenue growth led by operating leverage drives EBITDA growth YoY
* DIVI’s revenue grew 16.1% YoY to INR27.1b (our est: INR26.1b) for 2QFY26.
* Gross margin expanded 190bp YoY to 60.6%.
* EBITDA margin expanded 200bp YoY to 32.7% (our est: 31%), majorly driven by growth in gross margin.
* As a result, EBITDA grew 24% YoY to INR8.9b (our est: INR8.1b) for 2QFY26.
* Adjusted for INR630m in forex gain, PAT grew 31% YoY to INR6.4b (our est: INR5.8b).
Highlights from the management commentary
* DIVI had a CC growth of 10.7% in 1HFY26.
* The generics: CS share in sales for 2QFY26 stood at 44:56.
* This implies the generics segment grew 4% YoY, while the CS business grew 27.5% YoY for the quarter.
* DIVI has inaugurated the Peptide Center of Excellence. DIVI has engaged with several big pharma companies at different stages of clinical trials in peptide products.
* DIVI continues to invest in the lab and the manufacturing stage for peptides.
* DIVI manufactures its own protected amino acids. Hence, DIVI is in a superior position from the impurity standpoint.
* On a YoY basis, the volume gain in existing products as well as new products is getting offset by the pricing pressure.
* Capex stood at INR15.5b for 1HFY26. There is a scope of capex of more than INR20b in FY26.
* The US and EU formed 74% of sales for 2QFY26.
* The nutraceutical business was INR2.4b in 2QFY26
* DIVI has capitalized assets worth INR4.5b
* DIVI has progressed well on iodine-based contrast media products. DIVI is undergoing a validation process and will be qualified soon. DIVI is working with multiple global pharma companies for gadolinium-based contrast media products. This would take at least a year for commercial success.
* DIVI has witnessed stability in raw material prices over the recent past in the generics segment.
* Considering geopolitical turmoil, DIVI has maintained sufficient inventory levels to ensure the timely availability of required products to its customers.
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