India’s Pharmaceutical Sector: A Silent Giant Ready to Roar

In recent political discussions, the BJP’s manifesto has promised to make India the “API Market of the World” if they comes into power. This has significant implications for India’s pharmaceutical industry, particularly for companies specializing in APIs, or active pharmaceutical ingredients. APIs are the key chemicals in drugs, and there are companies that focus on either generic APIs, which are common and widely used, or niche APIs, which are specialized and often cater to specific clients.

Currently, the pharmaceutical sector in India is undervalued and has experienced a notable decline. However, a closer look at various pharma companies reveals a silent resurgence that the market hasn’t fully acknowledged yet. This presents a unique investment opportunity.

Neuland Laboratories Ltd: A Promising Contender

One of the companies worth considering is Newland Labs. With a share price of 6,339 rupees and a market cap of 8,133 crores, Newland Labs has a P/E ratio of 27, indicating a significant drop. Over the past year, their stock has seen some gains, though it has been performing well over the last five years.

Newland Labs focuses on the manufacturing and selling of bulk drugs, catering to both domestic and international markets. They export a majority of their products, with only 1% of their business coming from India. They deal in three main types of APIs:

• Prime APIs: High volume but low margin, making it a competitive field.
• Specialty APIs: Low volume but high margin, involving complex and less competitive products.
• Custom Manufacturing: High volume and high margin, tailored to specific needs of large B2B brands.

Despite facing financial challenges recently, Newland Labs showed improvement in March 2024 compared to the previous two years. Notably, significant investors, including Malabar India Fund, have increased their stakes, indicating strong future prospects.

Divi’s Laboratories Ltd: A Major Player

Divis Laboratories is another noteworthy company in the API space. It is a large company with a market cap of 1 lakh crore. Like Neuland, Divis saw a substantial drop in its stock price from 5,300 to around 2,700 rupees post-Covid, but it is now on a recovery path.

Divis operates in:

• Generic APIs: High volume, low margin products.
• Custom APIs: Tailored products for large pharmaceutical companies across the US, EU, and Japan.
• Nutraceuticals: Growing market for health supplements like omega-3 and shilajit.

Divis has cleared its debts and holds significant cash reserves, making it a robust player in the industry. With substantial stakes held by FIIs and DIIs, the company is well-positioned for future growth.

Syngene International Ltd: The Midcap Marvel

Syngene is a midcap company and a subsidiary of Biocon. It trades at a P/E ratio of 52 and operates as India’s first contract research organization. Syngene provides contract manufacturing services, with 400 active customers and 400 patents.

The company offers drug development services from pre-clinical trials to fee-for-service models. Syngene has shown consistent growth, with revenues steadily increasing over the years. Significant institutional investors, including the Government of Singapore and ICICI Prudential Business Cycle Fund, have invested in Syngene, highlighting its potential.

The Future of India’s Pharma Sector

The pharmaceutical industry is experiencing a silent turnaround. Companies like Newland Labs, Divis, and Syngene are showing signs of recovery and growth. Despite recent struggles, the sector is poised for a rebound as global and domestic demands stabilize. Major institutional investors are increasing their stakes, anticipating a positive shift.

As India aims to become the API Market of the World, these companies are well-positioned to benefit. Investors should keep an eye on the pharmaceutical sector, as it presents a promising opportunity for growth and returns.

By staying informed and proactive, you can capitalize on this potential upswing in the pharmaceutical industry. Remember, investing in undervalued sectors before they become trendy can lead to significant gains in the long run.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.