Indian API industry has the tide turned?

Over the past decade or so, API industry has lost out to Generics in attracting investments due to prevailing industry structure which favoured greater returns from Generics – faster growth and better margins among others. In the past three to five years, with Generics losing sheen with normalised margins and returns, API businesses are getting back onto investor radar. With inherent chemistry and engineering complexity, API manufacturing has the potential to create businesses protected by better moats. Another pain point of the API industry was Chinese exuberance in offering APIs at irrationally low prices, which eventually destroyed value for the entire industry as a whole. A slew of recent measures and events has established parity among all players – Chinese, Indian and European, with the anticipation that it should better industry wide performance. Indian API companies are well positioned to leverage the situation and improve their standing in the API industry. Financial markets have begun to recognise some of these players like Divis Laboratories, trading at market capitalisations comparable to generic companies with 10 times higher revenue. Besides large players like Divis, a bunch of upcoming Indian API suppliers led by MSN Labs have focused on developing a large number of niche, low competition APIs for supplying to the regulated markets. Such portfolio lends towards above industry average realisations and wider customer penetration. Besides public listing, API companies have been sought after targets for adjacent players in CDMO space, chemical companies, chemical distributors for forward/backward integration and creating additional revenue streams. A bunch of private equity players have already setup or in the process of setting up platforms to consolidation API companies, as we speak. For an investor, it is the key to understand the various business models and the key factors driving the choice of targets to ensure the strategy is well designed to succeed.