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

Ladies and gentlemen, good day, and welcome to the DVS Laboratories Limited Q2 FY '27 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. M. Satish Chowdhary. Thank you, and over to you, sir.

Good afternoon to all of you. I'm M. Satish Choudhary, 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 second quarter of FY '27. From Divi's Labs, we have with us today Dr. Kiran S. Divi, Whole-Time Director and Chief Executive Officer; Ilmno Desapriivi, Whole-Time Director, Commercial; and Mr. Venkatesa Pasumarthy, Chief Financial Officer. During the day, our Board has approved unaudited financial results for the quarter and half year ended September 30, 2026, 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 Genus 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 discussions 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 materially differ from what is expressed or implied. Divi's Labs or its officials does not undertake any obligation to publicly update any forward-looking statements, whether as a result of future events or otherwise. Now I hand over the call to Dr. Kiran Divi for opening remarks. Over to you, sir.

Good afternoon, everyone. Thank you for joining us today discuss Divi's Laboratories for the second quarter of the financial year 2027. I would like to begin by highlighting the key business development, operational progress and strategic initiatives undertaken during the quarter. Starting with our Generics business. Platform remained stable during the quarter supported by healthy volume growth across the business in certain products categories, we continue to maintain our focus on market competitiveness, manufacturing efficiencies and disciplined CapEx utilization. Our priority remains to sustain our market position while protecting the long-term economics of our operations. Coming to our Nutraceutical segment. Increasing global on preventive health care, wellness and scientifically validated ingredients presents opportunity for growth. We are expanding our capabilities to address this evolving customer requirements, leveraging our strength in chemistry, quality and large-scale manufacturing. customer remain strong across our portfolio with several programs advancing through different stages of development and commercialization. During the quarter, we have supplied validation quantities for select projects, enabling customers to progress with the qualification process. our major capital investment programs are also progressing through their respective to validation stages. We remain focused on completing these activities in alignment to customer requirements and applicable regulatory time lines, positioning these investments to support future continue to be an important growing portfolio. We continue to business sustained customer interest and program activities across the with several products currently are progressing through customer qualification. Our capabilities in this segment are supported by a vertically integrated manufacturing platform extending from to direct strike price and large segments. This integrated approach strengthens our control over critical inputs, enhancing manufacturing flexibility and supports our ability to address increasing the complex requirements from our customers. We continue to add capacity and are presently installing several 3,000 lines to meet the requirements of the programs we are working on. Technology development continues to be integral to our manufacturing strategy. We are further strengthening our industry platform through the addition of advanced technological capabilities by simultaneously expanding our to support usage of multiple enzymes at manufacturing. technologies are being successively deployed across selected products and processes with the objective of increasing process efficiencies, consistency, scalability, safety and overall manufacturing productivity. On the manufacturing front, Unit-III continues to assume a large goal within our production network. The facility is supporting our backward integration strategy through selected pre-chemistry operations, while enabling the phased transfer of activities from the existing facilities. Over time, we expect these initiatives to enhance manufacturing flexibility, improve utilization and strengthen our overall cost competitiveness. Beyond our business operations, we remain committed to creating a meaningful and sustainability impact in the communities Our CSR initiatives continue to focus on education, nutrition and access to essential infrastructure. Through our education programs, we are supporting thousands of students in rural communities by school infrastracture and contributing towards better childhood nutrition. leading water initiative has also expanded its reach and now access to clean drinking water to more than 13 lakh individuals everyday. To conclude, our priorities remain only centered on strengthening advancing customer programs, expanding our technological capabilities and improving manufacturing competitiveness. We believe that our continued investments in capacity and backward integration and process technologies together with our long-standing customer relationships to provide a strong foundation to support Divi's long-term growth. Thank you. I will now hand over the call to Ms. Nilima Prasad Divi, who will take you through the operational and financial highlights for this quarter.

Good afternoon, everyone, and thank you for joining us today to review Divi's Laboratories financial performance for the second quarter and first half of FY 2026-'27. We appreciate your continued interest and confidence in the company. Before presenting the financial results I would like to provide an overview of the prevailing global and environment and the measures we have undertaken to maintain operational manufacturing continuity and reliability in meeting our customer commitments. . The global operating environment continues to be influenced by geopolitical developments, particularly, the ongoing disruption in the Middle East and their implications for international trade and While the availability of solvents has remained largely stable, we have witnessed increased volatility in input costs, particularly petrochemicals solvents where prices have remained elevated. The Global Logistics also continues to face challenges. Security concerns around direct has led several major shipping lines to adopt alternate routes, resulting in extended transit times and higher ocean cost freight. Our air freight have similarly been impacted by increased fuel prices, airspace restrictions, reduced carrier capacity and sustained demand contributing to higher transportation costs and longer lead times. Against this backdrop, we have continued to adopt a proactive and structured approach to procurement and supply chain management. Our diversified network of domestic and international suppliers supported by advanced procurement planning and strategic inventory management has enabled us to mitigate potential supply disruption. We continue to maintain a rolling 3-month inventory coverage for critical materials, providing greater visibility and flexibility in production planning. This approach has been instrumental in ensuring uninterrupted manufacturing operations and minimizing the impact of fluctuations in material availability and shipment schedule. On logistics front, we remain closely engaged with our established transportation partners with advanced container bookings and continuous shipment monitoring to manage extended transit times and ensure timely bill relief to customers. While these measures require a calibrated approach to inventory and working capital management, our priority remains to safeguard manufacturing continuity and fulfill customer commitments. Close coordination across our procurement, manufacturing and logistics functions continues to support effective production planning and timely responses to evolving market conditions. Overall, despite the challenges in the external operating environment, our established supply chain practices, diversified sourcing capabilities and disciplined operational execution have enabled us to maintain stability across our operations. With this overview, I will now take you through company's financial performance for the second quarter and first half of FY '26-'27 ended September 30, 2026. For the second quarter, Divi's Laboratories reported consolidated total income of INR 3,770 crores compared to INR 2,850 crores in the corresponding quarter of the previous financial year, representing a year-on-year growth of approximately 32%. Profit before tax increased to INR 1,505 crores from INR 912 crores in the corresponding quarter last year, reflecting a growth of 65%. Profit after tax stood at INR 1,127 crores compared to INR 689 crores in the previous year, registering a growth of approximately 64%. For the first half of FY 2026-'27, consolidated total income stood at INR 6,907 crores compared to INR 5,389 crores in the corresponding period of the previous financial year. Profit before tax for the half year increased to INR 2,685 crores from INR 1,645 crores, while profit after tax rose to INR 2,029 crores from INR 1,234 crores in the corresponding period last year with 64% increase. Looking at revenue composition and business performance. Exports continue to constitute approximately 90% of standalone sales revenue, reflecting the company's from international business presence. Europe and North America together accounted for approximately 75% of the standalone sales revenue. On a constant currency basis, stand-alone revenue for first half registered year-on-year growth of 17%. In terms of business composition, Generic contributed 38% of sales revenue during the first half, while Custom Synthesis accounted for the remaining 62%. Our global nutraceutical business recorded income of INR [indiscernible] compared to INR 492 crores in the corresponding period of the previous financial year. Net material consumption for the first half stood at approximately 32% of the sales revenue compared to 40% in the corresponding period of the previous financial year. With respect to foreign exchange movements, the company recorded a net ForEx gain of INR 20 crores during the first half compared to a gain of INR 103 crores in the corresponding period last year. During the second quarter, the company capitalized assets amounting to INR 772 crores, taking a total capitalization for the first half of financial year to INR 1,023 crores. The capital work in progress stood at INR 1,538 crores as of September 30, 2026, reflecting the investments currently under execution. Turning to our balance sheet as of September 30, 2026, the company has held cash balances of INR 2,181 crores with trade receivables of INR 3,705 and inventories of INR 5,325 crores. These results reflect the company's financial performance during the first half of the year, supporting by its operating capabilities, diversified business portfolio and continued focus on disciplined execution. With that, I conclude my overview of the company's financial performance for the second quarter and the first half of FY 2026-'27. Thank you.

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

[Operator Instructions] First question is from the line of Amey Chalke from JM Financial.

Congrats management on super numbers. First question I have is on the CDMO business. This call also we have growth around 50% year-on-year for the CDMO business. And the fourth quarter was also similar The drivers we have mentioned for last 2 quarters for this growth is related to the execution of validation for certain projects. So is it possible for management to give color on excluding these revenues from validation batches, what would be the growth in RBS business for first half? And what would be based business margin What I understand typically the validation batches might not continuing following quarters and the margins on the validation batches are significantly higher than base business. So if you are unable to quantify on the validation batches if you can guide for the second half if this run rate we should expect to continue?

Thank you. So the valuation, like I explained in my -- during when I gave my point, the valuation batches for certain products are going on and are still continuing. And validation material qualification process and commercialization takes place. It's not that we are doing a insand there's nothing to do. So -- to answer your question, this is the ongoing business from our customers once validations are done. The next steps are only regulatory approvals and then it goes forward. And as I explained to you, we have several projects going on in the pipeline, which are going to the various stages. It's very difficult for me to quantify all the business and how business and the generic business at about 62%. Yes.

Sir, you had also mentioned that in the earlier calls that the inspection required post the validation batches, for the commercial bank to start. So is it possible to give update on same, when the infection is expected to happen and when commercial batch is expected to begin and will the margin be same for the commercial batches?

See, the agencies become a sector or whether the agency would qualify us based on our past history is like what I told is not being disclosed was based on whether it decides to come or is not something I can answer. Agency will give approval either based on past history or would be based on a 3 approval inspection. Until now, we did not receive on term. But as the validation batches go to our customers and they qualify us, then they submit the batches. It is then that we would know whether they would read an inspection or they will clear the file based on previous history.

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

Congratulations for the great set of numbers. My first question is on the -- again, the growth that we have seen, particularly on the Custom Synthesis side. So on an average, in the first half, we have seen near 50% kind of jump. So if we are talking about validation batches would have contributed, but validation may not only can drive growth on the overall base business -- our overall business by 50%. So even if I, let's say, adjust the rupee benefit to the extent of 10%, still it is a 40% kind of a volume-led jump. So what is driving, sir, really whether it is we have started some commercial supplies for new product or we have, let's say, started participating in the Semaglutide generic opportunity, what we have already seen? If you can clarify that, that would be helpful.

So firstly, I cannot name drugs, so I will not name any product names. So in terms of qualification and going forward, you know that Divi's has been historically working on several products since the last 30 years since the inception, Custom Synthesis has been one of our portfolio. And several of the molecules which have been worked and validated in the past have slowly being commercialized. See, what I'm talking about the new coalition and new is we have taken up in the last few years, then we have validated those products and we're waiting. But even before that, we had several products, which have gone through the same system and are being commercialized right now. They haven't commercialized. So this coming from there too.

Okay. play as now on the generic side for that is, correct, sir?

I don't think you can comment anything on any specific product, which is -- which we are not at liberty to answer because of the agreement that we have. But if you have like a basic generic action we already declared those we can answer, but specific customer, we cannot answer.

Yes, yes, sure. Then the next question comes from the cost side, ma'am. In fact, if you are seeing a 40% kind of, let's say, volume dump in the key segment of Custom Synthesis and all that. And -- but we are not seeing any major change in raw material cost in the absolute terms. So whether it's either the raw material material cost nor the total cost would have appreciated by more than 15%, while our volume is something like almost 40% like despite we have been talking about and all that. So what is helping this cost containment here and what is helping the boosting the kind of margins at the gross margin level?

I would say that we need to take a step back and look at the whole scenario from a bigger picture. We are seeing the Middle East. We are seeing the rise in as an gas and oil prices and now reflected in pharma industry. I will say the prices not only for me, even their cost increase because of the situation and my input material from them is also it's not just a solvents. Now why is it 32% to 40%, I think multiple and what it needs to be. Firstly,we need to and the Unit-III And over this, we will see we are in to make sure our supply chain is protected we do see certain cost benefits even So the major part shifting from 40% to 32% is coming from both

Okay. Just 1 clarification from my side. With regards to the dedicated contract. See, these 3 dedicated contracts are now closer to the commercialization possibly next quarter time that we will see the so in that case, generally, how long that we -- since it is dedicated, it should not take much longer time to see the ramp also. So if that is the case, will take to these 2 optimal utilization level for

So right now, I cannot comment on the utilization, but what I can tell you is they are -- like you said rightly said, there are closer to approvals. As and when we know the approval status, we will start commercialization in the next few quarters. And then they will be fully utilized because they are dedicated facilities, they have their own specialized equipment based on that process, which can only be used for that product, especially some of them require flow chemistry, some of them require high throughput technologies, which is -- that is why we have to dedicate the whole process for them.

Okay. And simultaneously, you in your opening remarks mentioned about creating several 3,000-liter kind of reactors for the peptide project. So, so far, we have been kind of working on the pilot posit, but you have mentioned about several 3 kL kind of reactors, capacity additions and all that. If you can just add something more on towards that and the time line when we can see the commercial benefit of the GLP-1 opportunity, if you can just add anything to that, that would be helpful.

I mean if you recall during my -- even during my last call, I clearly mentioned that we have several segments which are being validated. This is in my last earnings call, and I also said that we have also supplied several segments, which are in line of being validated. We're also expanding our capacity and installing several multi-tone 3,000-liter FPPS. This was what I discussed even in the last call. Now we are adding on based on the programs we have and the number of customer interest we have, okay, we are again building up more extra lines, okay, for, they're dedicated or further customer requirements because usually, these are long chain peptides, which - and these fragments require almost a month, 2 months to make them. That is why we are putting multiple lines based on the requirement. And for us, peptide is owned strictly only for innovation basis, we do not make generic peptides right now.

The next question is from the line of Dr. Kunal Dhamesha from Macquire Capital.

First one for the Kiran, sir. I think we had suggested in Q1 that we are supplying the validation batches for 3 projects. Could you give us an update on that number? I know maybe validation that is for some of them might not have been supplied, but does the cumulative number for projects, which are either in validation or qualification at this point in time?

That would be very difficult for me to say. All I can say is apart from the 3 projects we have -- which are major investment projects based on the complexity of the chemistry, which dedicated and several new technologies to be that's why we had to mention the investment was quite high and the commitment is also long term. Apart from the 3 projects really close to commercialization we are in the next 1 or 2 quarters, slowly the commercialization will come in. But the other pipeline, what we have with other customers, several of them have been validated commercialized. Some are going through valuations process, so it's difficult for me to give you an estimated amount of going on.

Just a number of projects

At any given time, maybe has handled about 60 to 70 projects all the way from weak industry prequalification for and it goes to the lab must be Phase II, Phase III molecules. So it's difficult for me to break up and take them up because they are different cases right now.

Sure, sir. And second one on the capital expenditure. We have spent about INR 8.5 billion plus in this first half. If you could share what's the outlook for the remainder of the year and maybe slightly medium term as well since we are seeing a lot of customer interest, especially peptide which I believe is CapEx heavy, but you could correct me if I'm long here, if you could give it would be great.

See, currently, as we mentioned earlier, CWIP is about INR 1,638 crores. And historically, if you see the last 3 years for i3 to 4 years or outlook has been about INR 2,000 crores plus or minus 20% every year. So considering the RFPs we have currently and basically looking at those RFPs from our strength point of view, I would say it would be around INR 2,000 crores plus or minus 20%.

I mean just to answer your question, Divi's proactively build blocks, though we may not invest into the equipment in the beginning. As and when opportunities arise and feel because molecules have to move from Phase III revalidation to commercial. So it's a long journey. So as and when we have the opportunity on the table, we will then start investing.

Sure. Just 1 of the additional capacities that we are putting in peptide.

Sorry to interrupt Kunal, sir, may we request that you return to question or follow-up. [Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just the first one is on the outlook for the second half. We did 17% constant currency growth for first half I believe our guidance of double-digit growth. So how should we look at second half? And I also want to add a qualitative point on this first question, which is around one of your top products likely to see monetization in Europe, rest of the world. Is there any life cycle management with the customer?

To answer your first question, I would say it would be double-digit growth, that's my way forward that I would look at. As we historically said we would look at a double-digit growth. Now 17% or is it going to be 10% or is it going to be 20%, I cannot comment too much on that. I would say, double-digit growth is the way forward. Can you please repeat the same question

Nirma, ma'am, our top product is something that That one is likely to see for our customers and I think November 2026 So have you seen a ramp down in requirements from them?

I cannot talk about any project as we have earlier mentioned, which are on the CDMO. See, the products would have gone generic, but I cannot comment on it.

Okay. Last question, quickly, just on your cash flow statement. If I were to look at PBT has grown 50%, 60% first half, but your cash flow from operations ahead of paying taxes has declined 50%, INR 959 crores for the first half of this year. So if you could just explain where the working capital is getting locked up in because the cash flow from operations have not been in line with the PBT growth.

See, as explained earlier, we are in a large CapEx cycle, huge capitalization was seen in this quarter around INR 700-plus crores. And with the work in progress of CapEx that's being incurred at this point of time, which is about INR 879 crores in -- no, I think the CWIP is about INR 1,638 crores where certain advances have also been disbursed. So the cash flow statement what you're looking at currently is mainly based on the large CapEx cycles that we are having at this point. We continue to remain prudent and conscious about our CapEx spend, but that's where I would say you need to focus on.

Got it. But just a follow-up, I think this is going back to the previous participant. If I were to look at CapEx...

Sorry to interrupt Shyam, sir, may we request that you return to question queue for follow-up. The next question is on the line of Vivek Agarwal from Citigroup.

The first question is not base capacity you have installed 3,000 looking down -- looking 3 years down the line, right, should we expect only incremental capacity additions from here on or would capacity potential increase to a multiple of currently installed base and the demand growth? I was just trying to understand the demand that you have and plans.

See coming to the right? It's Divi's has a critical player in peptide for the last 20 years. I mean not long before there are a peptide molecules key player that. That's how entered strength is that is what customers see as strength. And that is really also made the other key important factors like the and other things, which tremendously. Now in my previous calls, I did say that we have PPS. This was based on project specific for certain amount of validations which are in the process of taking place, have taken place also as as projects are moving. Apart from this, it's not just that we are working on GLP-1, we are working on several categories with several customers. And this requirement has the demand of having several lines, new lines to be put in place. And that is why we have cautiously decided to install several based on the projects with our customers.

And could you give us a rough sense of total capacity installed so even a range would be helpful around range, higher, lower?

I think if I say that it would mean in because I have some net in place. So all I will say is our -- with the capacity, we will be in the top 3 players.

Understand. Second question is on liquid phase peptide capacity. As some of the opportunities, especially oral peptides may require multiple tons of API volumes and -- so as may not be So I'm just trying to understand, I'm not taking any kind of meaningful expansion of liquid capacities as well from the commercial scale product?

That is not new to us. It's something that we can do. Everything depends on what the customer wants, whether you want to fragment or price to be made at a solid someone got into it completely depends on what the customer requires it is and manufactured. If you go the we end up with other impurities and the cleaning takes longer. If you go by a fragment, it is mix of both. So I cannot comment, but what I can tell you is for we are well advanced and very on that.

But at this moment, basically, you are not expanding the the way you are in building Is that the right way to understand?

I mean is the regular small volume reactors unlimited capacity for us. We can use one of our plans and make as much as wants.

Understood. And just 1 last question Are your commercial projects primarily with the large U.S.-based pharma company or are you also seeing meaningful opportunities, let's say, from

See, I cannot comment on this. All I can say is Divi's Custom Synthesis is with several multinational this for the opportunity sector therapeutic segment, and that will be cautious investments.

The next question is from the line of Shrikant Akolkar from Nuvama.

Two questions. Firstly, on validation business. Is it possible for you to tell us how many products we have applied to validation batches and it's also possible to tell us that how long will it take for these specific products to move from validation batches to commercial stage?

See, I guess, I answered this question, but I'll say it again. We have several projects in pipeline. And as I explained, we have been in the CES business for the last year, we have our oldest customer is 30 years hold in the CS business. and we have whatever valuations have gone on in the past or leading commercial and moving forward. These are new projects that are in dated right now. And based on the investment we had to announce 3 of the projects because they were specific to the project. It's not a multipurpose equipment these are flow chemistry, a few complicated equipment that we brought in. Now the valuations have been done. One is near commercialization. One, we have to wait for when the customer has to go through this validation and the approval. So the time cycle is in the next few quarters, we start seeing commercialization. Apart from that, there are several products in the pipeline, a Phase I molecule Phase II, which we actively work. And these in a phase-wise manner will slowly come to commercial validation, then approval, commercialization it has its own time cycle.

Understood. Now from the 3-year perspective, which is the area where we see a lot of growth. So we have peptides, contrast media and generics, so 3 years, what should we expect from these modalities?