CDMO players to maintain outperformance on multiple growth triggers

Divi's Laboratories remains the top pick for most brokerages in this segment, even as valuations turn rich after the sharp rally

The Nifty Pharma and Nifty Healthcare have outperformed the benchmarks and broader indices, with returns of about 17 per cent and 12 per cent, respectively, over the past six months. While most sub-segments such as diagnostics, hospitals and pharmaceuticals have done well, the listed majors in the Contract Development and Manufacturing Organisation (CDMO) space have been the stars of the returns charts, beating peers by a wide margin.

 

Led by Laurus Labs, which delivered an 87.5 per cent return, the top five listed players, which get at least 40 per cent of their revenues from the CDMO segment, have delivered an average return of 58 per cent over this period. Rising outsourcing and supply chain rebalancing initiatives by global pharmaceutical and biotech companies continue to be a major trigger driving the growth of CDMO majors. 

 

 

Going ahead, brokerages expect growth momentum to continue, given the rising share of biologics funding, a healthy pipeline of biosimilar opportunities and rising demand for peptides. While prospects remain strong, valuations (66 times FY27 price-to-earnings on average for the top players) — which factor in some of the growth gains after a sharp rally — could weigh on returns going ahead. 

 

Even as the core pharma sector exhibited a mixed picture in the June quarter, with strong domestic formulations and a weak US generics market, major CDMO players saw a strong performance, with top performers reporting over 20 per cent growth in revenues and 60 per cent rise in operating profit. 

 

The CDMO sector reported another quarter of double-digit revenue growth in the first quarter of financial year 2027 (Q1FY27) on a year-on-year basis. This highlighted the continued strength of underlying demand, despite a few companies facing temporary headwinds from customer destocking and product attrition, points out India Ratings and Research. It expects the sector's healthy growth momentum to sustain through FY27, supported by robust enquiry pipelines from global innovators, improving capacity utilisation levels, and ongoing capacity expansion initiatives. 

 

Furthermore, as recently commissioned capacities scale up, companies are well positioned to benefit from operating leverage and improved asset monetisation. The next growth phase will be increasingly driven by execution excellence and the successful commercialisation of past investments, points out the credit agency.  

 

The runway for Indian CDMO players remains strong as the segment, which currently generates a revenue of $3-3.5 billion and accounts for about 2-3 per cent of global CDMO revenue of $140-145 billion, is expected to rise by seven times to about $22-25 billion by 2035, according to InCred Research. 

 

Supply chain diversification is estimated to benefit CDMO players, with actions such as the inclusion of WuXi AppTec on the Pentagon's Section 1260H list (as also the BIOSECURE Act) accelerating this trend. US pharmaceutical companies, according to Deven Choksey Research, are likely to increasingly engage with alternative CDMOs, particularly in India, which offers regulatory-compliant manufacturing capabilities, strong quality standards, and cost competitiveness. In the near term, the designation is expected to drive a meaningful increase in requests for proposals (RFPs), feasibility studies, and customer engagements, according to Abhijeet Porwal of the brokerage. 

 

Divi’s Laboratories remains the top pick for most brokerages, including Macquarie and JP Morgan. Macquarie Research is positive on the segment and believes that global pharma giant Novo Nordisk’s manufacturing pivot reinforces the peptide CDMO investment case. Given the surge in demand for GLP-1 weight loss drugs, the company — which used to manufacture complex peptide-based active pharmaceutical ingredients in-house — is now outsourcing a significant part of its production to CDMO players.

 

Way2Wealth Brokers has an “accumulate” rating on Laurus Labs and Sai Life Sciences, driven by increasing global outsourcing, capacity expansion and differentiated technology platforms. While Divi's continues to generate industry leading margins and Syngene International remains a stable player in the sector, both trade at relatively rich valuations, according to the brokerage. Piramal Pharma and Akums Drugs and Pharmaceuticals are in the early stages of margin improvement, it added.