Lowering prices to weigh down earnings of Indian API players in near term

The prices of active pharmaceutical ingredients (APIs) have fallen drastically in the last one year and this comes at a time when revenue growth for Indian API players is bottoming. Analysts, thus, concur that the listed API entities will continue to see lower revenue traction in coming quarters as well.

“The movement in API prices reveals that the trajectory continues to remain downward. Recent media reports suggest the correction has deepened which may continue to impact Indian API players (due to lower revenues). Key APIs in therapies such as pain, cardiac, CNS and anti-infectives have declined in double digits over the last one year,” analysts at JM Financials wrote in a recent report.

According to the brokerage, prices of APIs such as Paracetamol, Azithromycin, Montelukast, and Meropenem, have all declined in the range of 10-30 per cent over the last one year. The sartans continue to see steep price declines which impacts players such as Ipca Labs, whereas Ibuprofen prices have remained largely stable during the period.

Sonam Srivastava, founder and fund manager at Wright Research said that a significant rise in global API manufacturing capacity, particularly in China, has resulted in market oversupply. Secondly, demand patterns are shifting as the pandemic subsides. The surge in demand for specific Covid-related APIs is normalising. Finally, geopolitical tensions have disrupted supply chains and logistics, further impacting API pricing.

Analysts believe that if Chinese industries continue to ramp up their production of APIs, it will impact the API prices further, and consequently impact the Indian API players in the near term.

"However, the West’s quest to reduce its dependence on China may help some Indian API players who function in the regulated markets such as the US and European Union playing China plus one. While the players exposed to emerging and domestic markets may continue to face pressure from the pricing," Surya Patra, vice president - Healthcare & Specialty Chemical Research at PhillipCapital.

Investment strategy

On the bourses, the stock prices of listed API players such as Aarti Drugs, SMS Pharmaceuticals and Divi’s Labs have zoomed by 16.7 per cent, 16.4 per cent and 15 per cent in the last one month, respectively. 

While others like IOL Chemicals, Laurus Labs, Neuland Labs and Alembic have shot up in the range of 9-13 per cent in the month of April. By comparison, the Nifty Pharma rose by 0.5 per cent during the period. 

According to analysts, players like Divi’s Labs, and Laurus Labs are not attractive at current valuations as they and other API players will face margin pressure due to the evolving Red Sea conflict. "We advise 'trimming' and remain 'underweight' on long term structural player Divis Labs. It's also a good time to get out of IOL Chemicals,” Patra of PhillipCapital said.

That said, analysts believe the industry pricing could be near its bottom, akin to its previous cycle having bottomed out in FY17 and FY18. Margins, too, they said, may be bottoming out for API companies at 20 per cent in 9MFY24. The consensus estimates suggest a moderate uptick in both revenue growth and Ebitda over the next two years.

They, thus, remain in a wait and watch mode for witnessing a reversal in the API pricing scenario, and suggest investors to track any reversal in Chinese API prices for signs of recovery.

Param Desai, senior research analyst, Prabhudas Lilladher said he doesn’t see much downside in the earnings of API players from here on. "API pricing will witness a gradual recovery from the April-June quarter of the financial year 2024-25 (Q1FY25), while the January-March quarter of FY24 may still see weakness," he added.