Divi's Laboratories Limited (DIVISLAB.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Earnings Conference Call of Divi's Laboratories Limited for Q1 FY 2026. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. M. Satish Choudhury. Thank you and over to you, sir.

Good afternoon to all of you. I'm M. Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of the company for the quarter ended 30th June 2025. From Divi's Labs, we have with us today Dr. Kiran S. Divi, Whole-Time Director and Chief Executive Officer; Ms. Nilima Prasad Divi, Whole-Time Director, Commercial; and Mr. Venkatesa Perumallu Pasumarthy, Chief Financial Officer. During the day, our Board has approved unaudited financial results for the quarter ended June 30, 2025 and we have released the same to the stock exchanges as well as updated the same in our website. Please note that this conference call is being recorded and a transcript of the same will be made available on the website of the company. Please also note that the audio of the conference call is the copyright material of Divi's Laboratories Limited and cannot be copied, rebroadcasted or attributed in press or media without the specific and written consent. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which are predictions, projections or other estimates about future events. These estimates reflect management's current expectations of future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. Divi's Labs or its officials does not undertake any obligation to publicly update any forward-looking statement, whether as a result of future events or otherwise. Now I hand over the conference to Dr. Kiran Divi for opening remarks. Over to you, sir.

Good afternoon, everyone. It's a pleasure to welcome you all to Divi Laboratories Q1 FY 2026 Earnings Call. We truly value the continued trust and interest from our investors, analysts and shareholders. And I hope you and your families are safe and doing well. As we reflect on our performance in the first quarter of the financial year, I would like to share some key insights that speaks of Divi's enduring strength, our operational resilience, innovation-led strategy and deep commitment to sustainable inclusive growth. Let me begin with our generic portfolio. We maintained a robust and competitive position in the global market, continuing to lead despite persistent pricing pressures. This resilience is a result of our strong backward integration model, which safeguards our cost structures and ensures supply reliability. Equally important are the long-term trusted long-term partnerships we have cultivated with our customers over the years. A critical contributor to the ecosystem is our Unit 3 facility in Kakinada, which became operational in Jan of 2025. This facility is strategically focused on producing key starting materials and intermediates, reinforcing our self-sufficiency and adding strength to our overall value chain. Turning to custom synthesis. This vertical continues to be a core growth engine. We are witnessing increased traction from global innovators who are actively seeking partners that can offer both scalability and reliability in a changing global supply chain landscape. Divi's track record, marked by timely delivery, rapid capacity creation and long-standing customer relationships has positioned us as a preferred partner. We are seeing a healthy pipeline of RFPs and customer site visits along the side of multiple active projects progressing through R&D, pilot and validation stages. Several of these are expected to transition into commercial scale within the next 12 to 24 months. We have also made significant strides in expanding our scientific and technological capabilities. We now offer advanced platforms in flow chemistry, biocatalysis and green chemistry, which are increasingly becoming differentiators for our global partners. Notably, our newly commissioned Solid Phase Peptide Synthesis capacity has garnered strong interest from large pharmaceutical companies, particularly those developing GLP-1-based treatments. In parallel, we are executing 3 major CapEx programs backed by long-term supply commitments, further strengthening our forward visibility. Looking ahead, we anticipate our estimated total capital expenditure for the financial year to be in the range of INR 2,000 crores. This investments will be directed towards advancing key strategic projects, expanding capacity and upgrading technologies across our operations. At the heart of our strategy lies our unwavering commitment to sustainable and inclusive growth. We continue to integrate principles of green chemistry, energy and resource optimization and process excellence into our daily operations with a commitment to reduce our environmental footprint while enhancing long-term competitiveness. Our effort extends beyond our factories. Through sustained CSR initiatives across Andhra Pradesh and Telangana, we have positively impacted over 82,000 students across 977 schools and improved the quality of life of nearly 1.3 lakh villages. These contributions affirms our belief that true success must be shared and that business growth must be aligned with the well-being of the communities around us. Thank you and once again for your time and continued support. I will now hand over the call to Ms. Nilima Prasad Divi, who will walk you through the financial highlights of Q1 FY '26.

Good afternoon, everyone. Thank you for the opportunity to present the financial overview for the first quarter FY 2025, '26. As we look back on the quarter, it's clear that our industry is at a pivotal moment, shaped by evolving market dynamics, regulatory developments and shifting global supply chains. The broader macro environments continue to be influenced by geopolitical uncertainties that are reshaping the global trade flows. Despite these challenges, our strategic clarity, disciplined execution and agile decision-making have enabled us to stay on course. We have continued to advance our operational excellence agenda by embracing digitalization and data-driven decision-making across our value chain. Strategic investments in automation, process analytics and digital monitoring tools have enabled us to enhance swiftness and reduce variability in plant operations. These efforts not only support cost and efficiency improvements but also reinforce our commitment to quality, compliance and long-term scalability. In parallel, we have strengthened our capabilities through targeted investments in process innovation and capacity expansion. These initiatives have helped us optimize costs, improving manufacturing efficiencies and uphold the highest standards of quality, positioning us well for sustainable growth. On procurement front, raw material prices remained stable throughout the quarter with healthy availability. We have taken a proactive approach by maintaining adequate safety stocks and diversifying our sourcing mix across domestic and international markets to ensure uninterrupted supply. Inventory levels remain broadly consistent with our historical norms, reflecting a calibrated approach to stocking, aligned with our expanding product portfolio. While we are steadily moving towards leaner just-in-time inventory models, our current priority is ensuring supply continuity. In the face of ongoing global uncertainties, maintaining prudent buffer stock remains a strategic necessity. Our backward integration efforts continue to play a crucial role here, enabling in-house production of key intermediates and starting materials, thereby strengthening supply assurance, quality control and cost efficiency. We are pleased to share that our Unit 3 facility in Kakinada, which commenced commercial productions in January 2025, is already contributing meaningfully to our production. The facility is playing a critical role in supporting our backward integration strategy, strengthening supply reliability, enhancing quality management and driving cost efficiencies. I will now move on to present the financial performance for the first quarter of FY 2025, '26, which ended on June 30, 2025. We have achieved a consolidated total income of INR 2,529 crores for the current quarter as against a consolidated total income of INR 2,197 crores for the corresponding quarter of previous financial year. Material consumption remains at about 40% of the sales revenue for the current quarter as well as corresponding quarter of previous financial year. Profit before tax for the current quarter is INR 733 crores as against a profit before tax of INR 604 crores for the corresponding quarter of previous year. Profit after tax for the quarter is INR 545 crores as against PAT of INR 430 crores for the corresponding quarter of previous year. On stand-alone basis, we have achieved a total income of INR 2,476 crores for the current quarter against INR 2,142 crores for the corresponding quarter of previous year. Profit before tax for the current quarter is INR 747 crores against INR 603 crores for the corresponding quarter of previous financial year. Profit after tax for the current quarter is INR 557 crores as against INR 430 crores for the corresponding quarter of previous financial year. Exports for the quarter is about 88%. Exports to Europe and U.S. during the current quarter are about 58% and 14%, respectively. Product mix for generics to custom synthesis is 47% and 53%, respectively. For the current quarter, we have a ForEx gain of INR 39 crores as against a ForEx loss of INR 1 crores for the corresponding quarter of previous year. Our constant currency growth for the quarter has been at 14%. Our global nutraceutical business amounted to INR 250 crores for this quarter as against INR 178 crores for the corresponding quarter of previous financial year. We have capitalized assets of INR 261 crores during the current quarter, of which assets capitalized for the Phase 1 of Kakinada project amounted to INR 114 crores. We have capital work in progress of INR 1,319 crores at the end of the quarter. As of the end of the quarter, we have cash on books of INR 4,205 crores, receivables INR 2,521 crores and inventory of INR 3,087 crores. Thank you.

Thank you, madam. With this, we will request the moderator to open the line for Q&A.

[Operator Instructions] The first question is from the line of Mr. Tushar Manudhane.

Sir, just considering the generic custom synthesis ratio with API segment seems to be lower for the quarter. And despite that, the gross margin is sort of lower sequentially. So if you could throw some light on this aspect? That's my first question.

Can you please repeat the question again?

Ma'am, considering the ratio of generics to custom synthesis of 47% to 53%, it implies that the API business has sort of been more or less flat year-over-year, in fact, reduced quarter-on-quarter as well. And given this backdrop, still the gross margin seems to be lower on a quarter-on-quarter basis. So basically, the reasons for the lower API trends and subsequently a reduction in the gross margin as well.

So the generics to custom synthesis ratio is 47%, 53% this quarter. And my -- the entire thing would actually reflect that the generics business had a higher component in this quarter compared to the custom synthesis. However, we have always maintained the stand that there could be lumpiness in one particular quarter with respect to generics and in another quarter with respect to custom synthesis. So it's not that what's being reflected in this quarter is going to be what -- is going to be there for the rest of the year. We would ask you to look at it in a holistic way in the complete year. We would preferably have it at 50% each.

Secondly, in the opening remarks, sir commented on biocatalysis as well in terms of the platform. If you could throw some light in terms of the kind of work that's happening in this aspect?

Sure. So as I explained in my speech, right, we are working on biocatalysis. We are working on resins. We are working on several different platforms, okay, based on what the market is looking for and what future we see. So at this point, we are more at the pilot scale working with few of the innovators on how to move forward on this. I'm not at the liberty to speak much more than this.

But this implies that we're going to get into the biologics route of manufacturing over a period of time, is that a correct understanding?

I would -- I'm not at the liberty to comment on that, okay.

And last, just one more, if I may. This backward integration impact is already reflected in the gross margins?

Yes, it is reflected in the gross margin, the backward integration and not just with respect to the revenue aspect but also with respect to the supply consistency and not being affected by various other disturbances that the other competitors would be having.

The next question is from the line of Mr. Kunal Dhamesha from Macquarie.

Just a clarification. So generic business is 53% of the revenue this quarter or it's 47%.

Generics business is 47% this quarter.

Sure, sure. And again, I think in the opening remarks, we alluded to pricing pressure in the generic business. Is that something that would have impacted the gross margins of generic business this quarter?

Yes, the pricing pressures are there in the first quarter as well, like they have been there the last few quarters we've been mentioning. Apart from that, there are also additional costs that are being incurred by the generic business, which are also there in custom synthesis but they are affecting more the generic business.

Can you, ma'am, elaborate on that? What type of cost?

It could be the logistical cost or it could be, say, for example, the Red Sea problem hasn't been solved yet. So the shipping problems are still there or it could be with respect to various other geopolitical issues that we are facing currently. So we are having -- I would say it's a mix of both. But yes, the pricing pressures are definitely being seen and they are still continuing. We are hoping that they would stabilize over the next few quarters.

Sure. And second question is on the peptide capacity. Is it now fully functional for us? And if you could now share how much is the capacity that we have put up and in which plant, that would be helpful.

So in terms of peptide capacity, we have created capacity for both our pilot work and also in terms of commercialization of our tetramers or aptamers. As you know, the total process is not that we just qualify and then we can start supplying. It has to go through the total qualification process, validations, customer approvals. So it's a time-taking table. So we will have to wait till the validations are done or some of them are in process and the qualifications. And once that is done, then we will have customer approvals and regulatory approvals. So this is a -- this will take some time line.

So if I remember correctly, we had said a couple of quarters back that this thing could get commercialized in 12 to 14 months. So that leaves us with more like 6 to 8 months now. Is it a fair time line?

I would -- again, our wishful thinking is 12 to 14 months. It all depends on the regulatory approvals. And then, I mean, we being a part of the innovator, it's based on his time line on getting the product commercialized.

Sure. And with your permission, if I may? Yes, yes, please go ahead.

Please tell me what you're saying.

Yes, yes. The last part is with Kakinada Phase 1, let's say, if we have to look at a broader level, how much raw material dependency can we reduce, let's say, our FY '25 raw material consumption was around INR 3,700 crores. So if you could provide a reduction with reference to that? And the second part is, would you be focusing on doing more backward integration for your CS projects or for generic products?

So to explain what Kakinada is doing right now is, we are freeing up GMP capacity in our existing Unit 1 and Unit 2. So there, we are -- we were in the past making critical starting materials, raw material, backward integrating in a GMP facility, which we have moved it to Kakinada right now, emptying space for us to do further new molecules validations and using the capacity for new molecules, new innovation products that are coming into space. So Kakinada is right now working on the existing molecules we're making at Unit 1 and Unit 2. I hope that answers your question.

So then it would have a more revenue impact rather than a gross margin impact, right? Because these things we were already doing at Unit 1, Unit 2, now that with the freed up capacity, you can do more projects on the GMP side for clients.

That is absolutely correct. But again, you must understand, while we go through qualifications, validations, all these will take time. See, we have emptied it now by 2025, January, production started, qualifications took place, then we have to qualify it in our own plant. After that the place gets empty, we have to start validation. So this will take some regulatory approval time, validation time. So it will take us some time before we see revenues from those streams.

The next question is from the line of Ms. Damayanti Kerai from HSBC.

My question is again on Kakinada. So right now, you're utilizing it for reducing your dependency on third-party KSMs, et cetera. So just want to understand for supplies to start to the customers, third-party supplies, say, to the U.S. and Europe, how long it might take to get the required qualifications approval, et cetera?

So you're asking about the qualification of Kakinada material in our APIs. Am I correct?

No, sir, I'm asking, say, like we are supplying from Unit 1 and Unit 2, which are GMP approved, right? So for Kakinada, when do you expect the GMP approval to come in, which will enable you to start supplies the way you are doing right now from Unit 1 and Unit 2?

So right now, strategically, what we have done is, we have emptied Unit 1 and Unit 2 with all the key starting materials and moved it to Kakinada Unit 3, so that we have GMP space immediately available for our immediate growth. While that is being done, certain long forward-looking products, which are getting off patent much later, we are qualifying them in Kakinada and then we will start the process, which will take at least 1 to 2 years before we have regulatory approvals in place for Kakinada. Till such time, instead of keeping capacity idle, we are making all -- we are working a lot on backward integration.

Okay. That's helpful. So Unit 1, Unit 2, with capacity freed up, what kind of utilization is there right now? Like how much headroom we have from current level to push forward?

Currently, our capacity utilization is at 80% this quarter, which has been consistent in the last 1 year. So even with additional capacity of Kakinada being -- coming into play, we are still at 80% capacity utilization, which is ideal for our organization.

Okay. And my second and last question is, Dr. Kiran mentioned about your Solid State Peptide Synthesis capacity gaining a lot of interest from customers, et cetera. And as you said earlier, it will take some time for getting the required approvals to see the numbers, et cetera. But can you just explain a bit how much capacity you have added? A few quarters back, you said you are adding 500 KL reactors, et cetera. So if you can provide some color on the capacity part, please?

So what I can tell you is, in the pilot scale, we have included a few 500 KL SPPSs. And then the commercial, we have procured a larger volume based on customer requirement. So since it is under a CDA and we have a long-term contract, I'm not at the liberty to talk about their capacity commitments.

Okay. So this already you have put in place and as customer demand comes in, you will utilize for commercial supplies?

As and when the qualifications and regulatory approvals are completed, we will start seeing commercial supplies.

Okay. And you are working with multiple partners, right, not only with one partner, if you can...

That is correct.

The next question is from the line of Mr. Surya Narayan Patra from PhillipCapital.

Sir, my first question is on the 3 dedicated plants that we are likely to commercialize over the next 12-month odd period. So in terms of the asset turnover, it would be similar to the kind of existing line of asset turnover what we are having for our plants. And any of these 3 unit are relating to peptide or contrast media?

So since they are CS projects, I'm not at the liberty to talk too much about it. But the 3 projects are going as per schedule. They have long-term contracts with volume commitment. So as and when the projects get commercialized, we will see the projects commercializing and you will see the future revenues.

Okay. Sir, about the peptide product capacity again. So is it possible to give some sense that, okay, what is the target market in terms of the volume for the peptide products, given the global market that is there we are targeting? And what volumes share that we can ultimately targeting over a period of time?

So see, because -- what I would like to say in terms of peptides is, Divi's is backward integrated, which gives us in a very strong position in terms of we make our key starting materials. We also make -- we're going forward with tetramers, aptamers. This gives us a unique position. Now that being said, we are working with several multinationals on several projects. I cannot give a capacity or a volume-based figure because I'm bound by confidentiality. But what I can say is most of the customers are coming to us because we have a strong backward integrated position.

Sure. Sir, just slightly differently, sir, if I try to understand the quantum of the substance -- drug substance for peptide drugs that would be required. Let's say, if we are talking about the injectable product, so let's say, for 1 billion or 100 million kind of cartridges, what quantum of the drug substance that would be required? Or let's say, if it is solid product for 1 billion tablets, what is the quantum of the drug substance that would be required in case of semaglutide or any other peptide? If you can give some sense about that, that would be helpful.

So that is something the innovator can answer, not me because we only produce the fragments and supply to various of them. So we do not know their dosage capacity and variability. As an API supplier, our job is just to supply the fragments, nothing more than that.

Okay. Just one clarification, sir, from my side regards the tariffs. If we see the kind of fine details of the U.K. and the U.S. transaction, so it is believed that pharma is not exempt out of this and more so about the branded products and also the intermediates for the branded products. So if that is the case, then what is the likely impact? I mean, sir, whether we should also be worried about the kind of a tariff impact on the custom synthesis supplies?

So see, right now, there is not a clear methodology on what the tariff will be. And whether it is for the intermediates or the APIs, I mean no clarity is given -- set forth. Without that, it's hard to comment on what is expected from our side. But what all I can say is, we have long-term supply agreements, which will protect the company. And if there are tariffs, we will then work with our innovator companies and see how to move forward.

[Operator Instructions] The next question is from the line of Ms. Neha from Bank of America.

First question on the generic pricing. It's been 2 years since we've seen pricing pressure. And I think Nilima ma'am made a comment about probably pricing stabilizing in the next few quarters. If you could just give some color on what essentially would help stabilize this price? Is this more supply going off the market? What gives us the confidence that you would probably see stabilization in pricing versus this trend continuing probably for longer?

Sure. So if you look at Nilima's comment, it's basically that we are hoping it will stabilize. And the pricing pressure is basically because of several geopolitical situations happening across the world. There are several -- there's a lot of instability. There's a lot of pricing pressure everywhere. And with the insurance companies also cutting down and looking at cost to margin products, that is the main reason why the pricing pressure on the generic side has been increasing. Now that being said, we being backward integrated and being a large volume supplier for several of the APIs we produce, having anywhere from 60% to 70% market share, we are able to sustain and have continuous supply and never -- and we are successful in not losing any market share.

But is it fair to assume that the pricing has gotten to a certain point where probably it becomes unviable for some of the high-cost manufacturers and therefore, you see a stabilization in prices at that point? How far do you think we are from there, particularly for the larger generics that we supply?

See, as of now, we do not see any concern -- at least on Divi's side, we do not see any concern on manufacturing or it becoming unviable. But at some point, the market has to stabilize because there will be several corrections that have to take place. So it's hard for me to comment on when this would happen.

Okay. Understood. And my second question is on contract media. I think last year, we've spoken about the gadolinium-based products being under validation and supplies for batch stocking. Based on your visibility and conversations with clients, when do we start seeing contribution from the gadolinium-based contrast media products?

Can you please repeat the question again?

Last year, I think you had mentioned about in contrast media, the non-iodine, the gadolinium-based supplies being under validation and probably commercial supply starting later this year. So how far along this process are we? And when do we start seeing revenue contribution from those non-iodine-based contrast media products?

Yes, sure. So I mean, just a small correction here. When I mentioned about this in November of 2024, I said that the products -- the [indiscernible] compounds were still under qualification stages. It was not under validation. So we were getting qualified at customers, okay? So the qualification with several customers have gone through. And we are still in the stage of getting -- going towards pilot studies and then validations or qualifications. So it is -- like I told you last time, it will take anywhere from 1 to 2 years and we are still standing by and hopeful that we should get some validations done by then.

Okay. So this should still be about 12 to 24 months away? Or are we closer to that?

We are hopeful for sooner. But right now, we are -- I mean, like I gave 6 months ago, we are thinking it will be about 24 months from -- or maybe 18 months from now. But we are hoping the validations and things would happen sooner.

The next question is from the line of Mr. Shyam Srinivasan from Goldman Sachs.

Just the first one on -- when I look at the annual report disclosures, it talks about valsartan, 6.4% of total revenue. So just curious from one of your top products, which you are supplying to the innovator, sacubitril+valsartan, it's gone generic in the U.S., as you may be aware, in the middle of July. So just want to understand how is our shipments going to vary on the path forward for valsartan and sacubitril+valsartan specifically? And just trying to tie it with your guidance, if you remember, you have said that it's double-digit growth. So any risk that may be there given that the product has got generic for your partner?

Firstly, I cannot acknowledge any product. So I cannot answer this question, to be fair. But what I can say is every brand company has their own strategy and we will abide by what the brand requires and we will supply them the products they need. If you look at historically, Divi's, we have been in CS business for the last 25 years. It's not something new. We had products coming in, products going off patent with customers and we managed even late life cycle of the molecule along with the customer. So I cannot talk about a particular product that [Audio Gap] you're talking about late life cycles, we do manage late life cycles with our customers.

Got it. That's very helpful, Kiran. Second question, just on the nutraceutical business. It's seen a good jump. Maybe last quarter, 1Q was not the right base but even Q-o-Q, it's gone up. So I remember a couple of years back, we had doubled our capacity. So if you could help us understand just the trajectory of this business going forward? And what is the scope for expansion here?