Divi’s Laboratories earnings beat driven by custom synthesis growth and margin expansion

Investment View and Valuation

Motilal Oswal Financial Services’ August 2, 2026 results update describes a strong 1QFY27 earnings outperformance for Divi’s Laboratories, led by custom synthesis execution and a favourable product mix. The broker retained its Neutral rating despite raising its FY27 and FY28 earnings estimates by 11 per cent and 5 per cent, respectively.

The Neutral view reflects limited valuation upside. Motilal Oswal’s target price of Rs 7,720 compares with the reported CMP of Rs 8,056. The broker values Divi’s Laboratories at 55 times 12-month forward earnings and forecasts a 21 per cent earnings CAGR over FY26-28.

1QFY27 Financial Performance

Divi’s Laboratories reported revenue of Rs 3,080 crore in 1QFY27, up 27.8 per cent year on year and 12 per cent above Motilal Oswal’s estimate of Rs 2,760 crore. EBITDA increased 72.2 per cent year on year to Rs 1,255 crore, 40 per cent above the broker’s estimate, while PAT rose 74.8 per cent to Rs 902 crore, 37 per cent ahead of estimate.

Gross margin expanded by 770 basis points year on year to 68 per cent, its highest level in 20 quarters. EBITDA margin expanded by 1,050 basis points to 40.7 per cent, compared with the broker’s forecast of 32.4 per cent. The margin improvement was supported primarily by a superior product mix and operating leverage.

Custom Synthesis and Generics Performance

Custom Synthesis

Custom synthesis was the largest business in 1QFY27, accounting for 60 per cent of revenue and growing 45 per cent year on year to Rs 1,850 crore. Motilal Oswal attributed the performance to broad-based execution across innovator programmes at the clinical-development, validation and commercial-supply preparation stages.

The broker expects custom synthesis to grow at a 20 per cent CAGR during FY26-28. Growth is expected to be driven by the commercialisation of dedicated capex projects, late-stage innovator programmes, peptide CDMO expansion and continued investment in manufacturing capabilities.

Divi’s Laboratories is expanding its process-development, analytical and manufacturing capabilities, including continuous-flow chemistry, biocatalysis and process intensification.

Generics and Nutraceuticals

Generics contributed 40 per cent of revenue and grew 8.8 per cent year on year to Rs 1,230 crore in 1QFY27, despite pricing pressure across products and geographies. Management reported a 40:60 generics-to-custom-synthesis revenue mix.

Nutraceutical revenue was Rs 300 crore, up 19 per cent year on year. Capacity utilisation was approximately 85 per cent across the company’s three manufacturing units. Motilal Oswal forecasts a 13 per cent FY26-28 CAGR for generics, supported by new API commercialisation, nutraceutical growth, contrast-media ramp-up, backward integration and manufacturing efficiencies.

Capacity Expansion and Project Progress

Management said three major capex programmes were nearing completion, with about 70 per cent of the planned investment, or roughly Rs 2,000 crore, already incurred. These projects will now move to qualification and validation batches.

• Divi’s Laboratories has begun iodine-based contrast-media supplies to one customer and expects supplies to a second customer within a few months.
• Peptide fragments are progressing through qualification and validation in both solid-phase and liquid-phase synthesis.
• The company has filed four peptide drug master files.
• Unit III at Kakinada is currently being used for backward integration and pre-chemistry.
• Regulated-product manufacturing at Unit III remains dependent on regulatory approvals, which management expects one to two years after project validation.

Management Outlook and Operating Conditions

Management reiterated its double-digit FY27 revenue-growth guidance, while cautioning that quarterly performance may remain uneven because of validation timing, regulatory approvals and changes in the custom-synthesis and generics mix.

The company expects FY27 gross margin to be comparable with or slightly above FY26. EBITDA margin is expected to remain similar to FY26, subject to raw-material costs, currency tailwinds and product mix.

Divi’s Laboratories increased inventory by about Rs 500 crore quarter on quarter to Rs 4,400 crore as it built a strategic buffer to support material availability.

Key Risks and Execution Constraints

• Volatile raw-material and solvent prices amid geopolitical disruption.
• Significantly higher sea and air freight costs.
• Container availability constraints and potential supply delays.
• Risk of inventory build-up as the company maintains a strategic buffer for material availability.
• Uneven quarterly performance due to the timing of validation batches, regulatory approvals and changes in business mix.

Earnings Forecasts and Conclusion

Motilal Oswal forecasts the following financial performance for FY27E and FY28E:

The broker views Divi’s Laboratories as positioned to benefit from CDMO demand tailwinds, technology upgrades, capacity additions and reliable supply to large innovator customers. However, it considers valuation upside limited at current levels and therefore retains its Neutral recommendation, with a target price of Rs 7,720 against the reported CMP of Rs 8,056.