Divi's performance exceeds expectations and is promising; Goldman Sachs raises target price.

Divi's Laboratories has far exceeded expectations in the latest quarter,State Administration of Foreign Exchange reporting an 18% year-over-year increase in revenue and a 50% increase in EBITDA. This growth was primarily driven by the Custom Synthesis (CS) division, which saw a 38% quarter-on-quarter increase and a 47% year-on-year increase, thanks to two major projects reaching full-scale production.

Currently, the CS division contributes 51% of revenue. Meanwhile, despite an increase in volumes, the generic drugs division's revenue fell by 5% year-over-year due to price pressures. Divi's reported a margin (excluding other income) of 31.7%, which is 400 basis points above Goldman Sachs (NYSE)'s expectations.

Divi's remains optimistic about achieving double-digit growth in the long term, supported by:

1. Commercialization of Kakinada Phase I: Expected to begin in the second half of Fiscal Year 2025, allowing for the release of existing unit capacity.
2. Market share growth: Divi's holds a significant global share in key molecules like Carbidopa and Levodopa.
3. Investment in new areas: Growth in peptides, sartans, and imaging agents.
4. Upcoming patent expiries: $20 billion worth of new generic drug patents are set to expire between 2025 and 2028.
5. Unique technology projects: Significant capital expenditure (7 billion INR) for long-term Custom Synthesis agreements.

Due to better revenue performance and operational leverage, Goldman Sachs has raised its earnings per share forecast for Fiscal Years 2025 to 2027 by up to 6%. The 12-month target price has been increased from 3,640 INR to 4,020 INR. Nevertheless, Goldman Sachs maintains a neutral rating, considering the balanced risk-reward ratio.

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