After strong gains, API stocks face little headwinds

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After strong gains, API stocks face little headwinds

Shares of active pharmaceutical ingredient (API) manufacturers may find things choppy in the coming quarters. Investors are forecasting higher growth from the first quarter to the next year which may not continue.

Many API players saw a rebound in revenue in the first quarter. However, the growth has been caused by disruptions in China’s supply chain, while many global companies followed a dual sourcing policy for APIs. Global companies were significantly sourcing for the increasing demand for drugs during the epidemic. This prompted some pharmaceutical companies to report API revenue growth of 5% to 49% YoY in the first quarter.

“Panic procurement, dual sourcing, and increased business through new products have increased demand for API products. It is the third most durable. Kunal Dhamasha, the analyst at Systaltic’s Securities, said whether the first two remain to be sustained in the long term as companies can still see increased competition from China.

In fact, Chinese competition cannot be ignored. In some products, China has too much capacity and can still change price dynamics to keep competition at bay. “The competitiveness of Indian players cannot be given, even with the government incentives announced so far. “The lukewarm response of Indian companies to the PLI scheme, with no significant capital to date, reflects some of the above concerns,” Spark Capital Advisors said in a note.

Another factor that has added to the optimism of API manufacturers is the expected increase in demand for import substitution. While they do not expect this trend to pay off in the coming quarters, it is likely to play out over the long term if local businesses can cut costs.

Shares of some API companies such as Hikaal Chemicals, Devices Laboratories, Solara Active Pharma, Newland Laboratories, Laurus Labs, and Aarti Drugs rose between 60% and 394% this year. Sometimes, evaluations ranging from 21 to 82 times seem exaggerated.

“Given that there are no material changes to the sector’s inherent profitability and long-term growth profile, we expect API’s stock valuations to reverse to reflect its capital intensity and mid-teens return. Capital used,” said analysts at Spark Capital Advisors.

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