Neutral Divi's Laboratories Ltd for the Target Rs.7,720 by Motilal Oswal Financial Services Ltd
CDMO execution drives earnings beat
* Divi’s Lab (DIVI) delivered higher-than-estimated financial performance for 1QFY27, with a 12%/40%/37% beat on revenue/EBITDA/PAT. Strong traction in the custom synthesis business led to an earnings surprise for the quarter.
* DIVI achieved the highest gross margin in the past 20 quarters. The segmental mix and currency tailwinds led to improved profitability during the quarter.
* Certain projects involving major capex are nearing completion, following which the company will undertake qualification and validation batch manufacturing.
* Moreover, peptide-related business remains a strategic growth driver for DIVI, with customer projects progressing as planned across solid-phase and liquid-phase production.
* The company also supplied iodine-based contrast media products during the quarter, with volumes expected to scale up in the coming quarters. ? We raise our earnings estimate by 11%/5% for FY27/FY28, factoring in:
a) scale-up in CDMO contracts
b) progression of certain capital expenditure towards commercial manufacturing
c) considerable volatility in certain raw materials/solvents prices due to geopolitical turmoil
d) improved offtake of Nutraceuticals. We value DIVI at 55x 12M forward earnings to arrive at a TP of INR7,720.
* DIVI is well-positioned to benefit from CDMO demand tailwinds, supported by continuous upgrade of its technology offerings and ongoing capacity additions. Further, the company’s consistent efforts to ensure the seamless supply of goods despite geopolitical issues have strengthened its long-term relationships with large innovator customers.
* We build in a 21% earnings CAGR over FY26-28. Given the limited upside from current valuations, we reiterate our Neutral rating on the stock.
Strong earnings outperformance led by mix-driven margin expansion
* DIVI’s revenue grew 27.8% YoY to INR30.8b (our est: INR27.6b) for 1QFY27.
* Gross margin expanded 770bp YoY to 68%.
* EBITDA margin expanded 1,050bp YoY to 40.7% (our est: 32.4%), majorly due to a superior product mix as well as operational leverage.
* EBITDA grew 72.2% YoY to INR12.6b (our est: INR8.9b) for 1QFY27.
* PAT grew 74.8% YoY to INR9.0b (our est: INR6.6b).
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