Divi's Lab Q3: Custom Synthesis Fuels Growth, Peptide Power Beckons
Overview
Divi's Laboratories posted a steady Q3 FY26, with custom synthesis driving 12% top-line growth. A one-time Rs 74 crore labour code charge impacted net profit. Operating margins remained strong at 34.2% due to a better segmental mix. The company anticipates new custom synthesis projects commercializing in H2 CY27 and sees broadening peptide applications beyond GLP-1 drugs.
Stocks Mentioned
The company's top-line growth of 12 percent was largely propelled by its custom synthesis business. Earnings before interest, tax, depreciation, and amortisation (EBITDA) margins improved to a strong 34.2 percent, a testament to a better segmental mix and effective operational leverage. This performance occurred despite a one-time impact of Rs 74 crore related to the newly implemented labour code, which affected net profit compared to the previous year. Divi's Laboratories (CMP: Rs 6,474; Market cap: Rs 1,71,878 crore) maintained its 'Equal Weight' rating from analysts.
Custom Synthesis Momentum
The management continues to see robust visibility for the custom synthesis business. Three projects are slated for commercialization by Q3 and Q4 of CY27, expected to offset the impact of products like the heart failure drug Entresto going off-patent. This segment's success highlights Divi's ability to secure and scale complex manufacturing contracts.
Peptide Opportunities Expand
In the peptides segment, Divi's Laboratories is focusing on producing long amino chains for innovators. The application of these peptides is broadening significantly, moving beyond GLP-1 drugs for diabetes and weight management to encompass other therapeutic areas such as cardiac issues and psoriasis. The company is actively engaged in pilot and commercial trials for various protected amino acids, intended for use as peptide fragments by clients or for internal applications. Divi's possesses capabilities in both Solid-Phase Peptide Synthesis (SPPS) and Liquid-Phase Peptide Synthesis (LPPS), crucial for manufacturing drugs like Mounjaro and Ozempic. Its key competitors in this high-growth space include global players like Bachem, PolyPeptide, and AmbioPharm.
Capex and Future Outlook
While capital expenditure (capex) guidance for FY27 has not yet been specified, the company is considering a phase 2 expansion of its Kakinada unit. A significant capital work in progress of nearly Rs 2,400 crore signals an elevated capex profile in the near term. With cash reserves of approximately Rs 3,000 crore, the current capex cycle is well-funded. Divi's Laboratories' gross asset turnover currently stands at 1.2x (FY25), with an intention to reach its historical benchmark of 1.5x to 1.8x over the next 2-3 years as new assets ramp up utilization and the peptide opportunity scales. Investors will be watching for a recovery in the generic business and the launch of gadolinium-based contrast media products. The stock currently trades at 35x FY28e EV/EBITDA, which analysts deem fair, leading to a continued 'on the sidelines' recommendation pending a more attractive entry level.
