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

Ladies and gentlemen, good day, and welcome to the earnings conference call of Divi's Laboratories Limited for Q1 FY '27. [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 am M. Satish Choudhury, Company Secretary and Chief Investor Relations Officer of Divi's Laboratories Limited. I welcome you all to the earnings call of Divi's Laboratories Limited for the first quarter of FY '27. From Divi's Labs, we have with us today Dr. Kiran S. Divi, Whole-Time Director and CEO; 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, 2026, and we have released the same to the stock exchanges as well as updated 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 con call is the copyright material of Divi's Laboratories Limited and cannot be copied, rebroadcasted or attributed in press or media without 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 the 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, and welcome to Divi's Laboratories earnings call for the first quarter of the financial year 2026-'27. Thank you for joining us today. I will begin with an update on the business and the key operational developments during the quarter. Our focus continues to be on execution, manufacturing reliability, disciplined capital deployment and strengthening the capabilities required to support long-term customer programs. Beginning with our generic business, volumes remained stable during the quarter, while pricing continued to reflect competitive market conditions across products and geographies. Overall, the business remained resilient based on our ability to manufacture certain key starting materials and intermediates in-house, which continues to strengthen our supply assurance and operational efficiency. This year also marks 20 years of Divi's in the nutraceutical segment, a journey that began with just 2 products has grown into a portfolio of over 100 offerings across human health, animal health and battery supplements, in multiple forms today. As we look at it, we are actively expanding in both capabilities and capacities to meet the demand of a rapidly evolving global market. Within Custom Synthesis, projects actively continued across all diverse portfolio of customer programs, covering multiple therapeutic areas and stages of development. We are supporting customers across clinical development, validation and commercial supply preparations with manufacturing activities aligned to individual regulatory and filing requirements. Likewise, the 3 major CapEx programs are nearing completion and validations are going on. As our projects progress, we remain focused on timely execution while continuing to build the infrastructure and technical capabilities required to support future commercial requirements. Peptides remains a strategic area of investment for the company. Customer programs continue to progress across multiple stages of development during the quarter. While qualification and validation activities for several peptide fragments are expected to advance over the coming quarters, alongside capacity expansion in both solid phase and liquidate phase peptide synthesis, we continue to strengthen the process development, analytical and manufacturing capabilities required for increasingly complex peptide chemistries. Our objective is to establish a scalable and reliable manufacturing platform capable of supporting a broad range of customer requirements while maintaining the highest standard of quality, compliance and operational excellence. On the manufacturing front, Unit 3 continues to assume a large role within our production network. The facility is supporting our backward integration strategy through selected pre-chemistry operations while enabling the phased transfer of manufacturing activities from our existing facilities. This enhances supply issuance for critical intermediaries, improving network flexibility and support more efficient capacity utilization across our manufacturing operations. The transfer program continues to be executed in line with qualification time lines, customer commitments, product demand and overall manufacture planning. Technology development also remained an important area of execution during the quarter. Progress continues across initiatives involving continuous low chemistries, biocatalysis and advanced automation within the manufacturing operations. These technologies are contributing to improved process safety, enhanced producibility, reduced process variability and more sustainable manufacturing routes for complex chemistries. We also continue to implement from the intensification initiatives across selected products to improve productivity and support efficient commercial scale manufacturing. Across our manufacturing network, ongoing investments in green chemistry, energy efficiency and continued profit improvement remain an integral part of our long-term operational strategy. Collectively, these initiatives strengthen our technical capabilities and enhance our ability to develop and deliver increasingly complex project, with consistency and reliability. Beyond our business operations, we remain submitted to create long-term social value to focused community development activities. During the year 2026, our CSR program reached more than 1.8 billion beneficiaries across the states of Andhra Pradesh and Telangana through initiatives in health care, education, livelihood development and community welfare. These programs remain an integral part of our long-term approach to be a responsible and sustainable growth. Thank you. I will now hand over the call to Ms. Nilima Divi, who will present the operational and financial highlights of the quarter.

Good afternoon, everyone, and welcome to Divi's Laboratories earnings call for the first quarter FY 2026-'27. Thank you for joining us today and for your continued confidence in the company. Before reviewing the financial performance of the quarter, I would like to provide an update on the operating environment and measures we have taken to maintain supply continuity, execution discipline and operational reliability across our business. As discussed during our previous earnings call, the external operating environment remained challenging during the quarter, particularly across global trade routes and sourcing channels linked to West Asia. Raw material availability remained largely stable although input cost trends continue to vary across categories. While prices of certain raw materials moderated during the quarter, solvent costs remain elevated for a significant part of the period. We continue to engage closely with the customers to evaluate commercially appropriate mechanisms to mitigate these costs wherever feasible. At the same time, the evolving geopolitical situation in West Asia has introduced additional uncertainty into global supply chain. Accordingly, we continue to monitor development closely and calibrate our procurement strategies, sourcing plans and inventory positioning in line with changing market conditions. Maintaining supply continuity remains one of our key operational priorities. During the quarter, we continued to maintain strategic inventory buffers where appropriate to improve material availability and mitigate the risk of supply disruption. Our procurement, manufacturing and logistics teams remained closely integrated, particularly for time-sensitive materials, such as solvents, where storage flexibility is inherently limited. Material availability continues to be reviewed at frequent intervals with procurement decisions aligned to production schedules, customer commitments and lead time assessments. We also maintained regular engagement with customers to ensure production planning and delivery schedules remain well coordinated as market conditions evolve. The efforts made over the past several years to strengthen procurement resilience, diversify our global supplier base and expand domestic sourcing capabilities have continued to support manufacturing continuity across our network. These initiatives, together with our backward integration program have enhanced supply assurance for several critical raw materials and intermediates while reducing dependence on individual sourcing channels. This integrated approach continues to strengthen the resilience of our manufacturing operations and supports our ability to consistently meet customer commitments. Global logistic conditions also remained challenging throughout the quarter. Freight rates across both ocean and air transportation remained elevated while the availability of containers and isotanks continue to require careful planning and coordination. International supply chain experienced congestion at several ports, tighter vessel allocation, cargo rollover, blank sailing and extended track transit, all of which increased operational complexities across export logistics. Despite these conditions, we continue to work closely with our logistics partners to ensure reliable execution of shipment schedules. While near-term external conditions remain uncertain, we remain committed to investing in manufacturing capabilities, supply chain resilience and enabling infrastructure to strengthen our long-term competitiveness. We believe these investments, together with our integrated manufacturing model, and disciplined approach to execution position the company well to support future customer requirements and create sustainable long-term value. With that, I will now take you through the company's financial performance for the quarter ended June 30, 2026. For the first quarter of FY 2026-'27, the company reported a consolidated total income of INR 3,144 crores compared to INR 2,529 crores in the corresponding quarter of previous financial year. Profit before tax increased to INR 1,180 crores compared to INR 733 crores in the corresponding quarter of last year, while profit after tax stood at INR 902 crores compared with INR 545 crores in the same period of the previous year. On a stand-alone basis, total income of the quarter was INR 3,037 crores compared with INR 2,476 crores in the corresponding quarter of previous financial year. Profit before tax increased to INR 1,165 crores from INR 747 crores, while profit after tax increased to INR 895 crores from INR 557 crores. On a constant currency basis, the stand-alone revenue recorded a growth of 10% during the quarter. Exports continue to account for approximately 90% of the stand-alone revenue. Europe and North America accounted for 75% of our exports. The business mix for the quarter reflects the custom synthesis contributing 60% of the revenue and generates accounting for 40%, respectively. Net material consumption for the quarter was 31.2% of the revenue from operations on a stand-alone basis, reflecting the continued benefits of our integrated manufacturing model and product mix. During the quarter, the Forex movements resulted in a net Forex loss of INR 7 crores compared with a net gain of INR 39 crores in the corresponding quarter of the previous financial year. Our global nutraceutical business reported a revenue of INR 298 crores compared with INR 250 crores in the corresponding quarter of last year. During the quarter, the company capitalized assets amounting to INR 451 crores, while capital work in progress stood at INR 2,034 crores as of June 30, 2026, reflecting the continuous progress of our ongoing expansion projects. As of the end of the quarter, cash and cash equivalents stood at INR 3,611 crores, trade receivables were INR 3,056 crores and inventory stood at INR 4,413 crores. Thank you.

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

[Operator Instructions] Our first question comes from the line of Kunal Dhamesha with Macquarie.

Congratulations on a very good set of numbers. The first one on the significant uptake in the custom synthesis business. I believe the initial commentary alluded that it still doesn't have a component coming from the dedicated CapEx project. Is that correct understanding?

It is hard to define that because like I said, we are undergoing validation of some of the CapEx projects. So a certain amount of product has also been shipped to the customer. Projects on the line at this point, yes.

Okay. So then just from an understanding perspective, sir, between the -- let's say, validation quantity to the CapEx that we have done. What is the usual ramp up in terms of the quantities we can see?

So once the validations are done, we will have to send the material to our customers where they have to do their own further qualification, get it into their formulations and then the agencies, different agencies have to approve. Only after that, we would then start commercial quantities. It's difficult for us to mention the quantities of the amounts because we are going by CDH at this point.

But sir, anything from history, let's say, can you share that from whatever validation panties commercial quantities are generally in this range?

Can you repeat the question, again, please?

From the history, can you share some broader range as to, let's say, if you spend x quantity for validation, then the commercial quantity when the project ramps up, are in the range of, let's say, 5x to 10x or 5x to 15x, just your historical experience?

Okay. So to answer that, right? It depends on the product that we are manufacturing. Some products, the annual demand is not more than 1,000 Kgs. Some products we manufacture are 5,000 to 6,000 tonnes. So it's very difficult for me to answer this question. It totally depends on the product. Some products go at microgram dosing for the customer -- for the end patient population. So it's a very broad statement you've asked. I cannot generalize this statement.

But sir, we have dedicated CapEx, right? So you would know like what's the total quantity we can produce to that extent now.

Can you repeat that again, please?

For the dedicated CapEx projects, we know what capacities we have put up, right? So then is it not fairly -- can you not provide some range as to what's the maximum capacity you can reach within those dedicated projects from what you are supplied to, let's say, validation stages?

Like I've said in my first statement, right, we are going by CDAs on the quantities and how much we'll be supplying, the product name and everything. I wish to share more, but I'm bound by CDAs not to share. All I can say is the validations have been completed, and we would be doing commercial as and when the qualifications with the agencies are completed. The quantities, how much we have order book value other topics, I'm not at the liberty to discuss.

Sure, sir. Sir, second question is on the peptide modality. And we know you also talked in your initial remark, so when you consider your backward integration into peptide building blocks, amino-acid your years of experience and the capacities that you have put up till now. If you consider all these factors and then look at the overall global peptide landscape and in the number of players that are there which most of us are aware, how many global CDMOs do you think can actually compete with all the advantages you have like with you in terms of cost and supply reliability over the next 3 to 4 years?

See, I cannot talk about other manufacturers, right? It's not right. But what I can talk about is, it is in a unique situation because I think we are the only ones who start from basic raw materials, build our own peptide building block, okay? Then we have protected amino acids. We do dipeptide, tripeptide. We have gone into fragments, okay? So we have a complete chain of backward integration, which gives us a much more better opportunity compared to others. So I can only talk about why Divi's is different. It's not fair of me to talk about how I will be more competitive than others. I mean we are seeing amazing opportunities in the fragment segment and several opportunities. So I mean, a lot of them are in pipeline. Some of them are in clinical phases. Some are going through validations right now. So as we speak, there are good opportunities in this line. That's why we've even -- in my speech, I mentioned we're again expanding our capacity by acquiring a few more 3,000.

And sir, lastly if I may...

Kunal, I'm sorry to interrupt you, but you may please rejoin the queue for more questions. We have a lot of participants.

[Operator Instructions] Our first question comes from the line of Surya Narayan Patra with PhillipCapital.

Congrats for the great set of numbers. My first question is about the dedicated project again. So before we start commercial supply of this anytime in the latter part of the current financial year. So what are the key milestones that we should be seeing, sir? Whether any regulatory approval would be a kind of key monitorable here or being these are like intermediate, FDA, inspection line and clearance that would not be a required aspect here.

See, all I can say is I'm a part of the innovative CMC filing. So I do not know -- it is, of course -- it will definitely require regulatory clearance, sir. It's not a raw material or a basic material. So will FDA come for an inspection, will FDA not come for an inspection, will the agency agree and take the file in and say you can start buying from Divi's. I do not -- I cannot answer for the agency. But what I can say is we are completely ready for all regulatory submissions. We are ready for inspection anytime if there is an inspection. And as the validations go through, all the data goes through once the customer files, we'll have more clarity on an assumption of time line.

Sure, sir. My second question is about the kind of margin trajectory that we might see going ahead because in the opening remark, as ma'am indicated that the market environment remaining difficult only in terms of sourcing raw material that you will take procuring trade challenges and all that. But thanks to the kind of INR depreciation, what we have seen significant this quarter, we have surprised significantly in terms of the margin front. So given this tailwind that we have already witnessed, so can you talk something about your margin trajectory, what if not on the number front, at least qualitatively going ahead, in the current financial year.

Currently, I would say that we did have quite a bit of increase in our raw material costs on various fronts. Mainly, we saw it on the solvent side, which we never saw before. And a few of the materials, which are sourced, which are dependent on those kind of solvents as well. And compared to Q4, Q1 did have a Forex loss as well. But if I have to say, like margin-wise, I would, as we always historically said, let's not look at it on an individual quarter basis. Rather, we look at it on a year basis, where sometimes there's a lumpiness in one quarter, and there is not so much of a custom synthesis business, but more of a generic business in another quarter. Considering this quarter, we did have more of custom synthesis, which is 60%. We do see the margins slightly higher than the previous quarter. But again, as we always said, there is lumpiness, we always look at year-on-year basis rather than just a quarter.

Sure, ma'am. Just one aspect from my last point here, I wanted to check. About the generic portfolio, we have been talking about entering into the new product post patent expiry opportunities. So anything that we would have added recently into our portfolio, if you can talk something about either number of product or the name of any specific that you would have recently entered into? Anything on that front would be helpful.

So in the last few years, as we have been validating and then we have filed about 4 DMF so far, with various customers. And these are right now we have supply validation quantities to them, and they undergoing qualifications as we speak. One of them actually is trying to look at having exclusivity with us long term. So right now, that negotiation is going on. And other than that, products like -- I actually mentioned 1 or 2 like that some we have. We have ticket filed multiple customers are qualifying us as we speak. And once the qualification is done, we are expecting in the next 3 to 6 months really commercial volumes will move out.

Our next question comes from the line of Damayanti Kerai with HSBC Bank.

My question is actually on your cost specifically on the change in inventory, where for the June quarter, the number which we are seeing is substantially larger than what we saw in the previous quarter as well as for the sales full year of March. So when we look at number change inventory is around INR 500 crores, compared to, say, INR 50 crores to INR 100 crore kind of number, which we saw for the previous period. So can you help us understand what has basically led to this large swing? And whether we see any reversal or normalization in coming quarters? Because I understand this is a major factor, which led to substantial difference in the gross profit level.

Yes. So what your -- like the increase on the stock is mainly, I would say, from 2 points. One, as you are aware, we -- in the last meeting as well, I have mentioned that we are stocking the material to make sure that we wouldn't have any production stoppage or a production loss. So we are doing -- we are currently stocking it on monthly basis, like any given point of pay for the next 3 months? Are we secured for our production. And these we are securing with a higher cost to make sure there is no production stoppage and there is no shipments that are delayed to our customers. And secondly, as Kiran has mentioned, some of our projects, new CapEx projects have gone into validation batches. And even those materials are being reflected in this. So it's a combination of both, that you have seen the increase in the stocks.

Sure ma'am, that's helpful. So to secure your supply as you mentioned, you are doing on a 3-month rolling forward basis. So till the time, uncertainty continues in the broader macro market, similar strategy will continue, right? You will talk the 3-month rolling basis to secure your supplies. That should be the ongoing trend.

That's something that we have consciously taken a decision that we would be like, I think, around March is the time when we decided we would be doing the rolling 3 months, and we would secure the material, and that's why we never had a production loss or shipment stoppage in the last few months.

Okay. That's helpful. My last question is on your statement on importance of Unit 3 in your entire supply chain. So as we discussed previously also, should we assume the key role which Unit 3 will play is to is to free up capacity for Unit 1 and Unit 2 by helping you more on the KSM and intermediate part? And we will unlikely see any commercial supply till the time its approved by key regulators. Will that be the case?

So Kakinada right now is playing a key role by doing our backward integrated work because we have several projects online either with innovators or in-house generic molecules, where we need additional capacity. And quickly to enhance and utilize existing regulatory approved plants, we are moving it a certain amount of chemistry, prechemistry works to Kakinada. But the eventual long-term plan is to qualify Kakinada with all regulatory clearances and start qualifying that plant 2. But every regulatory clearance also takes time. Even after we validate a certain new project, FDA will take its own time 1 or 2 years since it's a new place. And then they will qualify. So in the meantime, we are filling the plant with prechemistry products.

And what is the utilization level at Unit 1 and Unit 2 plant?

Around 85% I would say, across all 3 units.

Across all 3 units.

Next question comes from the line of Shyam Srinivasan with Goldman Sachs.

I want to callout you had given the nutraceutical absolute number. Can you give that. Can you call that out please?

It is INR 298 crores this quarter.

About INR 300 crores. So it was INR 250 crores last year same time and maybe INR 240 crores Q4.

Yes, that's right.

So when I back out the generic business , we still have probably single digit kind of growth or maybe flattish growth. When I look at the industry data, ma'am, I'm now starting to see at least in the month of June pricing for generics, API exports overall I'm talking about is starting to see positive inflection, similar kind of growth. I'm doing a very rudimentary way as you can imagine what is avaialble. Are you seeing any that generic pricing maybe one month is not the right extrapolation to do. But are you seeing any signs that we are at the end of a long generic pricing pressure cycle and from a China perspective are you seeing some of your...

Coming to the generic pricing, right? So you have to understand 2 things. One, there is a substantial increase in raw material cost itself. I mean their solvents have become almost double or triple the price. Certain solvent-based raw materials have increased substantially because of the issue in the Middle East. Because of this, the direct pass on is also being shared to the end customers by most of the generic. This is the increase you're seeing in the pricing factor that's going on. Even we have increased our price slightly where ever possible with our customers because others the products become unviable to even produce. So whatever you're seeing right now is a market correction based on the raw material prices that have taken a substantial hit. It's not based on the markets have corrected and the pricing pressure has gone down.

Got it. Kiran, any quantification of what is the solvent-led pricing change or adjustments that we have taken?

I mean that would be very difficult, right, because we manufacture close to 60 products now. I cannot generalize that statement. I have to go -- usually our calculations are product to product basis because every product uses a different solvent. Some are water based, some are heavily solvent-based. If you take a peptide, it's almost like use about 2,000 liters for 1 kilo. So it's hard for me to answer that question.

No problem. Just on the second question on Custom Synthesis, strong growth this quarter, 60% of total revenue. How should we look at the remainder of the year? Is this going to be -- is there an element of lumpiness in Q1 that you would kind of ask us to be less optimistic about and talk about full year where, if I remember in end of quarter 4, we had given like a double digit, maybe I'm extrapolating 10% dollar revenue growth. for us. Do you think there are upside to that following how Q1 has panned out?

I would like to stick to my statement saying that we will show double-digit growth no matter what. Lumpiness, I cannot -- see everything depends on -- after these validations are done, how the regulatory approvals will take place. Will it go really fast, whether the agencies will fast track these drugs and the approval process. I mean there are a lot of ifs in the situation, right? So it's hard for me to say, will it be 60-40 in the coming months? Will it be 50-50? Or I would like a healthy mix always, but for now, I would say that we would assure a double-digit growth for sure.

Our next question comes from the line of Tushar Manudhane with Motilal Oswal Financial Services.

Congrats on numbers. So just on these new projects, which have gone to regulation, are there any further validation, which are going to come in the subsequent like in FY '27 further or we have supply...

So we have -- like I explained, right, apart from these 3 projects, we have several other projects, which are in different stages -- in different stages of our pipeline, either they're in clinical study set or customers who are producing small volumes, some of them are on prevalidations. Some of them are undergoing validation. They may not require large investments. We may also use our existing facilities we have. So I cannot -- we do have several projects which are coming up in the next quarters, which will require validation as we go forward.

But like if I have to quantify earlier spoke -- without going into project-specific detail. Revenues of those validation are they sort of in sight similar to what you would have done in Q1 could that be able to...

Could you repeat your question, it's not clear, please.

I'm asking the size of the revenue with this validation that we have generated 1Q FY '27, the subsequent project, at least in the near term, would that be of similar size?

See, it's difficult to say that because price is different for each product and it's not like one size fits all. It differs for every product, different prices, different costs in different what do you say, chemistry capabilities that would require. But I would say, overall, as an organization, we always look at a double-digit growth. That's how our revenue model is being built. And healthily, we would want a good product mix, wherein we don't have heaviness of 1/3 of or 1 customer or 1 supply chain. So that's where we are at. We would say, if you want to look at a revenue projection, we are looking at double-digit growth.

Okay. Secondly, the 3 major CapEx would you just refresh in terms of the total amount that we have spent on this. Combined three projects.