Strong growth seen for Divi's Laboratories, but upside capped by valuations

The stock of contract development and manufacturing organisation (CDMO) Divi’s Laboratories was among the top gainers in the BSE 100 index on Monday. It rose 4.81 per cent as fourth-quarter revenues beat estimates across key segments, while margins hit multi-quarter highs.

 

The management has guided for double-digit growth for 2025–26 (FY26), which, coupled with stronger momentum from China+1 and the commercialisation of the blood sugar control drug glucagon-like peptide-1 (GLP-1), will act as key triggers. Brokerages, however, believe upsides are limited as valuations have turned expensive.

 

Divi’s posted a 12 per cent growth in revenues over the year-ago quarter. Although revenue growth has moderated after four consecutive quarters of top line growth in the 18–25 per cent range, this was on a higher base. Growth was led by the custom synthesis manufacturing (CSM) and generics segments, which grew by 12 per cent and 13 per cent, respectively. 

 

Motilal Oswal Research points out that despite pricing challenges in the generics portfolio, Divi’s was able to deliver robust growth in active pharmaceutical ingredient (API) revenue, indicating strong volumes. The second half of 2024–25 (FY25) witnessed a meaningful recovery in the API segment for the company after almost eight quarters of weak performance, highlights analyst Tushar Manudhane of the brokerage.

 

The company’s gross margins expanded by 120 basis points (bps) year-on-year to 62 per cent, while at the operating profit level, margins expanded by 250 bps to 34 per cent — the highest in 11 quarters. The gains were driven by an improved product mix and operating leverage and came amid ongoing procurement and logistics challenges. 

 

For FY25, the company registered top line growth of 19 per cent and a 360 bps expansion in operating profit margin, marking a rebound after two consecutive years of decline.

 

Antique Stock Broking believes the shift to lower-volume, higher-value products likely resulted in sizeable savings on power, fuel, and logistics costs between 2022–23 and FY25. Analyst Gaurav Tinani of the brokerage believes this shift towards a more value-accretive product mix is sustainable and will continue to support margin expansion going forward.

 

Brokerages say the outlook for its key segments remains bullish. Kotak Research expects the company’s CSM sales to grow by 26 per cent over FY25 through 2027–28 (FY28), aided by forward integration in GLP-1s, a couple of new large projects coming onstream from the second quarter of 2026–27 (FY27), contrast media, and macro tailwinds. This, coupled with a recovery in generics, should drive 27 per cent earnings growth over FY25–28, believe analysts at Kotak Research, led by Alankar Garude. Though bullish on the company’s prospects, the brokerage has a ‘sell’ rating on the stock due to expensive valuations.

 

Motilal Oswal Research has raised its earnings estimates for FY26 and FY27 by 5–7 per cent, factoring in increased investments on the back of long-term contracts, moderating raw material costs, and superior execution in the generics segment. The brokerage has a ‘neutral’ rating, as current valuations at 62x FY26 earnings and 50x FY27 earnings provide limited upside.

 

Elara Research believes Divi’s continues to be the best-quality firm in the CDMO space, with a proven track record of execution. However, analysts led by Bino Pathiparampil point out that valuations have priced in narratives that are unlikely to materialise at the pace of investor expectations. They have a ‘sell’ rating, as narratives around China+1 and GLP-1 have sustained very high growth expectations and taken the stock valuation beyond reasonable levels.