The prognosis for fiscal 2023- 2024, though, is buoyant, with Candle highlighting a range of factors that augur well including the ongoing India “refocus” by most large companies and also a recalibration of plans in the US.

On home turf, the investment banking and consulting services firm referred to the surge in domestic formulations mergers and acquisitions over the last nine months, with deals worth an estimated INR40bn ($500.6m) having been executed and more such action – transactions worth another INR60-70bn could be in the pipeline going by media reports.

“As integration benefits percolate, we will see additional EBITDA margins benefits in the domestic businesses,” Candle Partners added.

In the US, several companies are refraining from making fresh investments “learning from under-performance of even the leaders”.

Further incremental captive investments in API assets are expected to play out soon; the out-performance of the API industry and “China+1 demand” has made several companies increase their investments in the APIs segment, with some firms having created separate companies / subsidiaries led by professional managements.

On whether the Indian API sector is heading for a strong run in the medium term both in terms of valuations, returns and providing medicines security factoring in geopolitical tensions, supply chain issues, China + 1 sourcing strategies , the onshoring moves, among other aspects, Candle’s managing director Navroz Mahudawala maintained that from a demand perspective, the API industry should continue to do well.

“However, we may see some near term challenges till raw material price volatility and logistics costs challenges don’t get sorted,” he told Scrip.

Mahudawala explained that the API universe had a dream run in the 2018-2021 phase - several companies got rerated.(Also see "India's API Firms Buoyant But Big Generic Cos See US-Led Swings" - Scrip, 28 April, 2020.)

“However, the recent commodity price increases in many base chemicals has affected the profitability of several companies. Also, we have seen a reduction in growth rate in FY 2022 and initial prognosis suggests FY2023 will see a similar trend,” the executive added.

Another component adding to the improved prospects for Indian pharma is private equity capital increasingly playing a key role in ownership of companies.(Also see "2021 Deal Action In India: Watch Private Equity And E-Pharmacy" - Scrip, 4 January, 2021.)

Several large PEs are keen to do control deals in the industry - KKR snapped up a controlling holding in JB Chemicals & Pharmaceuticals Ltd. in 2020 while Advent International acquired a controlling stake in the APIs-focused RA Chem Pharma Ltd. from Micro Labs Limited, among other deals.(Also see "Hot Space: PE Advent Snaps Up Second API Manufacturer In India" - Scrip, 15 March, 2021.)(Also see "Ex-Janssen India Chief To Lead PE-Controlled Bharat Serums" - Scrip, 18 February, 2020.)

The Asia-focused private equity firm PAG and consortium partners CX Partners and Samara Capital had in 2020 bought a controlling stake in Anjan Drug Pvt. Ltd. The consortium at the time indicated that it expects to move towards the creation of a platform to tap into the “consolidation opportunities” in India’s high-growth API manufacturing industry.(Also see "Asia Deal Watch: Rhizen Licenses Chinese Rights For PI3K Inhibitor To Curon" - Scrip, 20 October, 2020.)

Under professional managements, these businesses will “aggressively chase growth” and one can expect better financial performance, Candle predicted.

Overall, Candle is optimistic that growth would come back by next year for Indian pharma aided by better regulated market performance and the renewed focus on home ground.

“The ongoing cost rationalization exercises across companies would also lead to a 2-3% incremental EBITDA margin. However, the markets would need to see validation of the same before it rerates the sector,” it added.

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