Expensive valuations may limit upside for Divi's Laboratories stock

Despite strong custom synthesis growth and better-than-expected quarterly results, analysts caution that high valuations could restrict near-term gains for Divi's Laboratories

The stock of the country’s second largest pharma company by market capitalisation, Divi’s Laboratories, lost 2.4 per cent since its results last week. While the performance of the pharma firm for the second quarter (July-September) of 2025-26 (Q2FY26) was better than estimates, valuations are in the expensive zone. At the current price, the stock trades at about 60 times its FY27 earnings estimates. 

Revenues in the quarter were up 16 per cent year-on-year (Y-o-Y) and 12.7 per cent sequentially. The gains were led by custom synthesis (CS), which was up 28.7 per cent. The segment accounted for 56 per cent of revenues. 

The CS sales were above estimates on the back of a strong execution in multiple projects. The company expects the segment to post robust growth, given higher request for proposals and interest from global innovators, and three long-term supply agreements, which are at various stages and are expected to be onstream from the second half of 2026-27 (H2FY27). Its long-term relationships, third phase development of Gadolinium compound (contrast agent in magnetic resonance imaging or MRI scans), and a strong peptide pipeline will also drive growth. 

The growth in the generics business was lacklustre, growing 5.2 per cent Y-o-Y and falling 7.2 per cent on a sequential basis. This was led by pricing pressure, though volumes helped offset the impact on volume growth. While there was no loss of clients, capacities, or volume in the active pharmaceutical ingredient (API) segment, the company does not expect an improvement in pricing. This could weigh on the revenues in the next couple of quarters. 

The company’s gross margin increased by 192 basis points (bps) Y-o-Y to 60.5 per cent, and was largely driven by the manufacturing of starting material for the key molecules in Unit 3 Kakinada. The company has constructed six blocks in Unit 3, and intends to add two more blocks, which can further aid margin increment through backward integration, pointed out Foram Parekh of BOB Capital Markets. 

The brokerage has a “Hold” rating on the stock. Owing to the interim upside risk for the CS business from loss of exclusivity of key molecule sacubitril valsartan (chronic heart failure drug) in the US, the brokerage pegs its valuation at 56 times September 2027 earnings per share, with a target price of ₹7,098 per share.

 

While the operating profit expanded by 24 per cent Y-o-Y, operating profit margins expanded by 208 bps over the year-ago quarter at 32.7 per cent. Elara Securities projects margins to be 33.7 per cent for FY26, with small gains thereafter. Analysts led by Bino Pathiparampil of the brokerage said, “Given the higher competition from several firms in India, it may not be easy for operating profit margin to expand to a historical peak of 39-40 per cent on a sustainable basis.”

 

The brokerage has lowered its FY26-FY28 earnings per share estimates by 1-3 per cent, and has a “Sell” rating, given expensive valuations. Narratives around China + 1 and glucagon-like peptide (GLP)-1 have kept high growth expectations alive and taken the stock valuation beyond reasonable levels, it says.

 

Motilal Oswal Research is positive, given its differentiated skillsets such as peptide and contrast media manufacturing, enhanced reliability for supply despite geopolitical turmoil, and capacity that would cater to future requirements. However, it has a “Neutral” rating, given that the current valuation adequately factors in the earnings upside.