Q4 Red Sea + Biosecure tailwinds vanished.

Is the backward integration impact already reflected in the gross margins?

Yes, it is reflected in the gross margin. Backward integration helps not just on revenue but also on supply consistency and protects from disturbances that competitors may face.

Just a clarification - is generics 53% of revenue this quarter or 47%?

Generics business is 47% this quarter.

On the pricing pressure in the generic business mentioned in opening remarks - has that impacted the gross margins of generic business this quarter? What type of additional costs?

Yes, pricing pressures continue in Q1 as in recent quarters. Additional costs include logistical costs, the unresolved Red Sea problem affecting shipping, and other geopolitical issues - more affecting the generic business than custom synthesis. Pricing pressures are still continuing and we are hoping they would stabilize over the next few quarters.

On Kakinada Phase 1, how much raw material dependency can be reduced (FY25 RM consumption was around Rs. 3,700 crores)? And will more backward integration focus be on CS or generic products?

Kakinada is freeing up GMP capacity in Unit 1 and Unit 2 by taking over the production of critical starting materials and raw materials. This emptied space at Unit 1 and Unit 2 will be used for new molecules, validations, and innovation products. Kakinada is currently working on the existing molecules previously made at Unit 1 and Unit 2.

So would this have more revenue impact rather than gross margin impact, since the freed-up capacity allows more GMP-side projects for clients?

That is absolutely correct. However, qualifications and validations take time. Production at Kakinada started in January 2025, qualifications then take place, then validations have to be done, requiring regulatory approval time. So it will take some time before we see revenues from those streams.

On Kakinada - currently used to reduce dependency on third-party KSMs. For supplies to start to customers in US/Europe, how long might it take to get the required qualifications and approvals?

Strategically, Unit 1 and Unit 2 have been emptied of key starting materials by moving them to Kakinada Unit 3, freeing GMP space for immediate growth. Long forward-looking products with later patent expiry are being qualified at Kakinada, and the process for regulatory approvals will take at least 1 to 2 years. In the meantime, capacity is being utilized for backward integration.

With Unit 1 and Unit 2 capacity freed up, what is the current utilization and how much headroom is there?

Current capacity utilization is at 80% this quarter, consistent with the last 1 year. Even with Kakinada coming into play, utilization is at 80%, which is ideal for the organization.

Is the SPPS capacity already in place and will be utilized for commercial supplies as customer demand comes in? And working with multiple partners?

As and when qualifications and regulatory approvals are completed, commercial supplies will start. Yes, working with multiple partners, not only with one partner.

On generic pricing - it has been 2 years of pricing pressure. What essentially would help stabilize the price? Is it more supply going off market? What gives confidence on stabilization?

Pricing pressure is due to several geopolitical situations, instability and insurance companies cutting down and looking at cost-to-margin products. Divi's, being backward integrated and a large volume supplier with 60% to 70% market share for many APIs, is able to sustain continuous supply and not lose market share.

On contrast media - last year you spoke about Gadolinium-based products under validation and supplies for batch stocking. When do we start seeing contribution from Gadolinium-based contrast media?

When mentioned in November 2024, Gadolinium compounds were under qualification stages, not validation. Qualifications with several customers have gone through and the products are still in pilot studies and moving towards validations or qualifications. It will take anywhere from 1 to 2 years and validations are hoped to be done by then.

So is it 12 to 24 months away or are we closer to that?

Hopeful for sooner. Right now thinking it will be about 24 months or maybe 18 months from now, but hoping validations and things would happen sooner.

On nutraceutical business - it has seen good jump even Q-o-Q. A couple of years back capacity was doubled. What is the trajectory going forward and scope for expansion?

Currently seeing a steady growth in nutraceuticals. There was a dip post-COVID as multivitamin and other businesses went down, but now seeing steady improvement and rise. Capacity will be increased as and when required on the nutraceutical side.

Beyond GLP-1, there is innovation in IL-23, PDCs etc - where is the company placed and are you working with innovators in these segments?

There is growing interest in several therapeutic segments in peptide-based innovation. Divi's is active with several multinationals at various stages, in Phase II, Phase III, Phase I. Investments will be made and projects taken forward as innovators progress through regulatory clearances.

In the last 3-4 years contribution from European market has increased and American market decreased. Is this a strategic shift or planned mix going forward?

It is not a strategic shift. The shipment location depends on where the customer asks the product to be delivered. The same product could go to multiple locations - some quarters more to Europe, some quarters more to US. It is mainly customer-driven.

Previous concall guidance was Rs. 1,400 crores capex, now revised. What kind of opportunities are you seeing in next 3-4 years given the revised capex?

Divi's has disclosed to the Stock Exchanges that it has entered into three large projects. The capex being implemented is mainly based on those three projects, which is what has increased the number.

On Kakinada - what will trigger Unit 3 inspection? Will it be commercial product or late phase product?

Kakinada is currently making pre-chemistry. Certain own generic molecules and future generic molecules are being qualified, so as and when it triggers an FDA inspection or EU GMP inspection, it will start commercializing and supplying regulatory quantities.

Specifically on GLP-1s - peptide is currently from Unit 1 and Unit 2. For Unit 3 to get into this, what triggers inspection? Approved product or late phase trial?

Quick clarification - it has never been mentioned that peptide production would take place in Kakinada. In the future, based on capacity requirements and allocation, this may be considered, but right now with existing demand on SPPSs, both Unit 1 and Unit 2 will be used.

On the three projects recently signed - qualitatively at what stage are these projects? Molecule under clinical trial or already commercialized?

All three molecules - some are just commercialized, some are commercialized and well within the patents, and some have just completed Phase III going forward.

On geopolitical issues - US focusing on captive manufacturing. How are innovators looking at sourcing? Any change vs 1 year or 6 months ago?

As of now, Divi's has not heard any concern from innovators. While there is a desire by the US government for manufacturing in the US, no stress or concern has come from customers towards Divi's. There are long-term committed contracts in place and it is too early to comment on tariffs as nothing is in place.

On generic segment - plan and timelines for new product pipeline previously mentioned? When will products be launched?

New product pipeline includes Brivaracetam, Ticagrelor and a few others. DMFs are filed, validations are completed and Divi's is waiting for customers to get approval to start supplies. In the next 6 to 12 months, some movement of products on commercial volumes is expected.

Historically Divi's has dominated as a small molecule CS company. GLP is a fairly large molecule after a long time. Is there a focus to do more large molecules going forward or staying with small molecules?

Looking at historical data, Divi's prefers to maintain generics and custom synthesis at an equal pace. Similarly, Divi's would want to maintain small molecules and large molecules equally and ensure focus is on both. Selection is based on chemistry opportunities and capabilities, not just on volume - some are low-volume high-value products and some are large volumes with decent margin.

How is Divi's integrating green chemistry and ESG principles into manufacturing and client engagement? Could this be a competitive moat in CS and API partnership over the next 5 years?

Divi's has been very active in green chemistry over the last few years and it has become part of the DNA - looking at atom-to-atom efficiency and understanding every mole of waste produced. Divi's is one of the few companies that completely recovers solvents at 90% to 95% recovery and reuses them in the same process. This gives a unique strength in both generic and custom synthesis sides of the business.