Profit rose faster than revenue

Q2 revenue from operations
₹3,676 croreRevenue was ₹2,715 crore a year earlier.
Q2 profit after tax
₹1,127 croreProfit was ₹689 crore a year earlier.
Sunday intraday high
₹11,194 a shareThe shares gained more than 8% during Muhurat trading, according to The Economic Times.

Divi’s Laboratories reported on Saturday that second-quarter profit rose 64% to ₹1,127 crore as revenue from operations increased 35% to ₹3,676 crore. The shares gained more than 8% to an intraday record of ₹11,194 during Sunday’s Muhurat trading session, according to The Economic Times.

The result was operationally strong. Profit before tax increased to ₹1,505 crore from ₹912 crore even though the foreign-exchange gain fell to ₹24 crore from ₹63 crore. Expenses rose only 16% to ₹2,265 crore, much more slowly than revenue.

The question for investors is not whether the reported profit increased. It is whether the margin and revenue gains represent recurring commercial production or partly reflect validation batches, inventory accumulation and work awaiting customer approval. Divi’s did not provide enough information to separate those effects.

The quarter shows strong demand and better production economics, but it does not establish how much of the improvement will recur.

The profit increase is real, but its conversion into cash is not yet established.

Custom synthesis drove the margin

Custom-synthesis share
62%Management disclosed the proportion for standalone sales in the first half.
Net material consumption
32% of salesThe ratio was 40% of sales in the previous first half.
Constant-currency growth
17%This refers to first-half standalone revenue.

Custom synthesis, in which Divi’s manufactures molecules for drug developers, accounted for 62% of first-half standalone sales. Generics supplied the remaining 38%. Management said first-half standalone revenue grew 17% in constant currency, while Europe and North America together generated 75% of standalone sales.

The sales mix helped lower net material consumption to 32% of sales from 40% a year earlier. Management attributed the improvement to higher custom-synthesis activity and backward integration at its Kakinada plant, where Divi’s makes more of its own inputs.

Some custom-synthesis revenue came from validation batches, which customers use to qualify a manufacturing process before commercial production. Analysts repeatedly asked how much growth and margin came from those batches. Chief executive Kiran Divi declined to quantify it, saying older projects were also entering commercial production. Without that split, the quarter does not show how much of the margin can persist.

Divi’s has demonstrated pricing, mix and cost benefits, but it has not quantified the contribution from temporary validation work.

Cash did not follow profit

First-half operating cash flow
₹384 croreOperating cash flow was ₹1,645 crore in the previous first half.
Inventory cash outflow
₹1,585 croreInventories increased to ₹5,540 crore at 30 September.
Capital expenditure payments
₹872 croreThese payments appear under investing activities, outside operating cash flow.

First-half profit rose to ₹2,029 crore from ₹1,234 crore, but operating cash inflow fell to ₹384 crore from ₹1,645 crore. The profit increase is real, but its conversion into cash is not yet established.

Inventory absorbed ₹1,585 crore of cash and receivables absorbed another ₹604 crore. Trade payables released ₹561 crore, partly offsetting those outflows. Consolidated inventory consequently reached ₹5,540 crore at 30 September, up from ₹3,954 crore at the end of March.

When an analyst asked about the fall in operating cash generation, management pointed mainly to the capital-spending cycle. That answer was incomplete. Payments of ₹872 crore for property, plant and equipment were classified as investing cash flow and therefore did not cause operating cash flow to fall. The filed statement shows that working capital, led by inventory, was the main cause.

Working capital, not capital expenditure, caused the weak operating cash conversion shown in the filed cash-flow statement.

The inventory may support growth

Cash and cash equivalents
₹303 croreThe group also held ₹1,933 crore in other bank balances.
Annual capital-spending outlook
₹2,000 croreManagement gave a range of plus or minus 20%.

The strongest case against concern over cash conversion is that the inventory increase is deliberate. Management said Divi’s stocked three months of critical raw materials because conflict in the Middle East threatened supply and raised input prices. It said most of the increase reflected larger physical volumes held at different production stages.

The balance sheet can absorb that decision. Divi’s reported no current borrowings, ₹303 crore of cash and cash equivalents, and ₹1,933 crore in other bank balances at 30 September. Three project-specific custom-synthesis programmes are progressing through validation, while several peptide-fragment programmes are undergoing customer qualification.

Management also expects annual capital expenditure of ₹2,000 crore, plus or minus 20%, based on customer requests. If customers take the accumulated material and the dedicated plants move into commercial production, working capital should release cash and current margins may prove less temporary. That possibility makes the development mixed rather than plainly negative.

The strongest defence is that Divi’s is financing customer-backed growth from a debt-free balance sheet rather than accumulating unsold commodity stock.

Approvals will decide the outcome

Capital work in progress
₹1,638 croreThis was the consolidated balance-sheet figure at 30 September.
First-half capitalisation
₹1,223 croreManagement said ₹772 crore was capitalised in the second quarter.

One of Divi’s three large dedicated projects is close to commercialisation, management said. The other two may advance over the next few quarters, but customers must complete qualification and secure any required regulatory approvals. Divi’s had not received notice of a pre-approval inspection when it held Saturday’s earnings call.

The company had ₹1,638 crore of capital work in progress at 30 September and said it had capitalised ₹1,223 crore of assets during the first half. Those investments can lift revenue, but dedicated equipment may have limited alternative use if a project is delayed.

Management retained a forecast of double-digit revenue growth for the second half but would not raise its margin guidance or state how much validation revenue would recur. The next quarterly filing needs to show whether the ₹5,540 crore inventory balance falls, operating cash flow catches up with profit, and the first dedicated project begins commercial supply.

Customer and regulatory approvals, followed by inventory conversion, will determine whether the quarter marks durable growth or an unusually favourable production phase.

Sources

  1. Outcome of Board Meeting held on November 07, 2026 Ref: Regulation 30 ... · nsearchives.nseindia.com
  2. DIVI'S LABORATORIES LIMITED CIN: L24110TG1990PLC011854 · divislabs.com
  3. Divi's Laboratories Ltd Q2 2027 Earnings Call Transcript · alphastreet.com
  4. Divi's Labs jumps 8% to 52-wk high on Q2 profit spike · economictimes.indiatimes.com
  5. Divi's Labs Q2 result: Net profit rises 64% to ₹1,127 cr on higher ... · business-standard.com
  6. Divi's Lab net profit surges 63% to ₹1127 cr in Q2 - The HinduBusinessLine · thehindubusinessline.com