After sharp stock rally, valuation hurdles may cap Divi's returns

Strong custom synthesis growth, peptide opportunities and higher earnings estimates support Divi's outlook, but elevated valuations could restrict further stock upside

The country’s largest listed contract development and manufacturing organisation (CDMO), Divi’s Laboratories, started 2026-27 (FY27) on a strong note, with its first-quarter (April-June/Q1) results coming in considerably ahead of estimates. While revenue growth was led by the custom synthesis segment, operating profits were lifted by inventory gains.

 

Brokerages expect revenue and margins to post robust growth over the next couple of years, driven by opportunities in glucagon-like peptide (GLP-1) drugs for diabetes and weight loss. Brokerages remain positive on the CDMO major’s outlook and have also raised their FY27 and 2027-28 (FY28) earnings estimates. Given the Q1 performance and outlook, the stock was among the top gainers in the BSE 100 index, rising about 3.3 per cent and adding to its 26 per cent gains over the past month.

 

Aided by the custom synthesis segment, which accounted for 60 per cent of revenue, and currency tailwinds, the company’s revenue grew 27.8 per cent year-on-year (Y-o-Y) and 8.8 per cent sequentially. The company said revenue growth in the custom synthesis segment was driven by the commencement of three capital expenditure projects entering the validation stage. While the custom synthesis segment reported 45 per cent Y-o-Y growth, generic active pharmaceutical ingredients grew 6 per cent and nutraceuticals rose 19 per cent.

 

The revenue beat, according to Systematix Research, was aided by robust execution across commercial molecules, a higher contribution from commercial manufacturing programmes, and a favourable product mix. The generics business marginally underperformed due to continued pricing pressure, while nutraceuticals delivered a stronger-than-expected performance, supported by healthy global demand and continued portfolio expansion, it added. While the brokerage has marginally revised its estimates following a strong Q1, it has maintained a ‘hold’ rating with a target price of ₹7,959, as the sharp run-up in the stock largely reflects the improving business outlook, limiting meaningful upside from current levels.

 

ICICI Securities is also positive about the opportunity in custom synthesis projects, though it believes the current valuation adequately factors in the medium-term opportunity. While the brokerage has raised its FY27/FY28 earnings per share estimates by 6-9 per cent to reflect better margins, it has downgraded the stock to a ‘sell’ rating with a target price of ₹6,500.

 

The operational performance also exceeded expectations, with gross profit rising 44 per cent, about twice what the Street had estimated. Gross margins expanded by 766 basis points (bps) Y-o-Y to 68 per cent, driven by a richer custom synthesis mix and favourable inventory movements. Operating profit grew 72 per cent Y-o-Y, while operating margins expanded by 1,050 bps Y-o-Y to 41 per cent on the back of operating leverage and manufacturing efficiencies. These gains came despite employee expenses rising 20 per cent Y-o-Y and other expenses increasing 12 per cent.

 

The company reiterated its confidence in sustaining double-digit revenue growth over the medium term, supported by the commercialisation of validation projects, peptide opportunities, ongoing capacity additions, and continued momentum in the custom synthesis business.

 

Analysts Maitri Sheth and Stuti Bagadia of Choice Institutional Equities said the peptide opportunity remains the most significant long-term growth driver, with the management continuing to add capacity in response to strong customer demand. In addition, 18-20 projects are already under commercialisation, highlighting a broad and healthy pipeline that should support sustained growth over the medium term, they said. Supported by improving backward integration benefits and operating leverage, the brokerage has revised its FY27/FY28 earnings estimates upwards by 4.6 per cent and 2.9 per cent, respectively. It, however, maintains a ‘reduce’ rating with a revised target price of ₹8,355.