Indian Pharma-36.pdf

Why has Indian Pharma been one
of the worst performers in the
2020-2022 bull run?
AN INTROSPECTION FROM THE STUDY OF
INDIAN PHARMA: 2012 – 2022
August 2022
www.candlepartners.com
1

© 2020, Candle Partners – All Rights Reserved. (www.candlepartners.com) 2
Executive Summary (1/2)
Contrary to popular perception amongst several capital market investors that Covid has been a game-changer for the
entire health sciences industry in India & it’s a sector to be bullish on, data seems to suggest something contrary. The
Indian Pharma Industry over the last 12 months has been a substantial under-performer with majority of the stocks
giving double digit negative returns while the overall market (BSE Sensex) delivered a +9% return. The large caps have
given a –ve 7% median return while the mid-caps have given a –ve 20% median return. While API segment did well in
2019-2021 phase, the segment has given a –ve 24% median return on the last 12 months
While the reasons are manifold, we think its important to trace a long term trend of the industry to understand what
has gone wrong & probably what needs to change for the sector to get back on track. We evaluated a 10 year history
of the sector and to get the correct picture broke up the data into Formulations Generics and APIs to understand some
of the “data cuts” better. The Key findings:
Low sales growth rate : Over the last 5 years the sector has reported revenue growth of 7%. If we remove some of the
companies from the mix & nullify the effect of inorganic growth, the growth rates of several larger companies is in low
single digits. The low sales growth is possibly the single biggest factor behind the bearishness of the stock markets
USA piece has remained flat for last 5 years : The single biggest contributor of these low growth rates has been flat /
negative growth for the USA businesses of several companies. While in every successive year there has been promise /
guidance of a better year ahead; these predictions have never come true!
India & ROW have been the key positive factors for the industry : For most companies these two business plans
have been growing at ~10-12% and which has helped in mitigating the USA performance
EBITDA margins peaked in 2014 at 28%; we are now averaging at 20-21% post substantial cost rationalisation and
cut in R&D spends

Executive Summary (2/2)
R&D spends have seen a sharp cut-back – from a historical 9% in FY 16/FY 17 to the current 5-6% levels. While this is
good for near term ROCEs, long term implications are questionable
Substantial reduction in capex spends suggest an over-capacity especially in solid dosages – The sector in the
earlier years has spent 20-25% of Gross Block in New Capex. In recent years this number has been ~10%. There is a
direct co-relation between this parameter and the under-performance of the regulated markets
Working Capital cycle has deteriorated to 151 days (ie approx. 5 months) this is a cause of concern and probably is
a leading indicator of tepid demand. Until regulated market demand increases, we believe the cycle would continue to
be in the 140-155 days range
ROCE has been in the 11-13% range for last 5 years ; it peaked at 26% in FY 14
Deleverage has occurred for formulations generics universe which is a positive – lower investments and lower
growth has aided in release of cash and most companies have managed to reduce leverage – debt as % of total capital
from a high of 31% is now down to 17%
Contrary to the Formulations Generics Universe, the Indian API Industry has been a study in contrast
• 5 year revenue CAGR of 15%
• EBITDA margins consistently in the 24-28% bracket
• ROCE in the 20% range
• Capex as % of Gross Block being maintained in the 18-19% range
• Debt as % of total capital being maintained in the 19-21% range
• However, working capital cycle at 173 days is a cause of worry

Valuation Multiples
We evaluated the valuations of our universe of companies across the
pre & post covid time horizon and their recent price performance vis
a vis overall markets

Valuation Multiples
Indian Generics – Large Caps
As on 31st March 2020 As on 31st March 2021 As on 30th July 2022 TTM
July'22
Stock
Returns
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
Sun Pharma 2.5x 12.0x 22.4x 4.1x 16.2x 49.4x 5.4x 20.5x 58.2x 22%
Dr. Reddy’s 2.9x 20.2x 25.6x 3.9x 19.0x 38.5x 3.1x 16.8x 22.8x -13%
Cipla 2.0x 10.9x 22.1x 3.3x 15.0x 27.3x 3.5x 17.4x 31.5x 6%
Torrent Pharma 4.7x 17.1x 32.6x 5.7x 18.5x 34.4x 6.3x 22.3x 64.6x -0.4%
Zydus Lifesciences 2.3x 13.7x 23.3x 3.2x 15.2x 21.2x 2.4x 11.4x 16.3x -41%
Lupin 1.7x 11.1x NA 3.0x 17.6x 38.1x 2.0x NA NA -42%
Biocon 5.1x 19.8x 43.4x 7.0x 31.0x 58.0x 4.5x 20.2x 52.0x -21%
Alkem Laboratories 3.4x 19.2x 24.7x 3.7x 16.8x 20.9x 3.7x 23.1x 29.5x -7%
Aurobindo Pharma 1.2x 5.6x 8.5x 2.1x 9.6x 9.7x 1.2x 7.3x 13.4x -40%
Median 2.5x 13.7x 24.0x 3.7x 16.8x 34.4x 3.5x 18.8x 30.5x -7%*
TTM July'22 BSE Sensex LargeCap Return: 9%
TTM July'22 BSE Sensex Return: 9%
*Represents the weighted average stock returns for TTM July’22 | Source –S&P Capital IQ & CP Analysis
Except for Sun & Cipla, all large caps have given negative returns over last 12 months with several of them having declined
40%+ (vis a vis +9% return for BSE Sensex)

July'22
Stock
Returns
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
Ipca Laboratories 3.8x 19.5x 29.1x 4.3x 15.3x 21.2x 4.2x 21.3x 35.2x -5%
Alembic Pharma 2.5x 9.9x 12.1x 3.5x 12.1x 16.1x 2.7x 20.8x 43.7x -11%
Ajanta Pharma 4.5x 17.2x 25.5x 5.2x 15.2x 23.7x 4.5x 17.2x 23.0x -17%
NATCO Pharma 4.9x 16.2x 20.1x 7.3x 24.6x 34.1x 5.1x 22.7x 30.0x -33%
Glenmark Pharma 0.9x 5.3x 7.5x 1.5x 7.7x 13.5x 1.1x 6.0x 12.7x -37%
JB Chemicals 2.0x 9.8x 14.4x 4.4x 16.1x 21.6x 5.2x 24.7x 36.8x -2%
Jubilant Pharmova 0.8x 3.6x 4.4x 2.1x 9.2x 13.0x 1.3x 8.0x 19.2x -47%
FDC 2.1x 9.6x 14.0x 3.2x 12.9x 16.0x 2.3x 16.9x 22.2x -33%
Wockhardt 1.3x 31.8x NA 2.2x NA 6.7x 1.6x 29.3x NA -41%
Indoco Remedies 1.9x 17.0x 80.0x 2.3x 12.7x 28.6x 2.4x 12.1x 23.2x -14%
TTM July'22 BSE Sensex MidCap Return: 4%
Valuation Multiples
Indian Generics – Mid Caps
All Mid-Caps gave negative returns in the last 12 months ; vis a vis a +9% BSE Sensex return, this universe had a 20% decline

July'22
Stock
Returns
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
Divi's Laboratories 9.6x 28.4x 38.4x 13.5x 32.9x 48.5x 10.7x 25.6x 32.7x -22%
Granules India 1.6x 7.2x 10.9x 2.5x 9.3x 13.7x 2.1x 11.1x 17.7x -21%
Laurus Labs 1.6x 7.8x 13.5x 4.3x 13.3x 19.8x 5.7x 20.1x 33.5x -18%
Shilpa Medicare 2.5x 10.4x 12.8x 3.7x 13.8x 18.4x 3.6x 22.0x 59.8x -30%
Aarti Drugs 0.8x 5.6x 8.3x 3.1x 15.5x 23.1x 1.7x 13.8x 20.3x -38%
Dishman Carbogen 0.7x 2.9x 4.7x 1.2x 9.2x NA 1.4x 9.2x NA -40%
Hikal Ltd 0.9x 5.0x 10.2x 1.3x 7.0x 13.3x 2.0x 13.9x 30.6x -53%
Neuland Laboratories 0.7x 5.4x 22.4x 3.0x 19.1x 33.2x 1.9x 13.1x 25.5x -35%
SMS Pharma 0.8x 4.3x 6.9x 2.2x 10.2x 16.8x 2.2x 13.8x 27.4x -51%
Valuation Multiples
Indian APIs
Inspite of a superior financial performance vis a vis formulations generics, the API universe after having a great run in the
2020-2021 period also drastically under-performed; 24% average decline over last 12 months

HQ Country
As on 31st March 2020 As on 30th July 2022 TTM
July'22
Stock
Returns
EV/ TTM
Revenue
EV/ TTM EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
Teva Pharma Israel 2.1x 26.0x NA 2.0x 7.2x NA -3%
Mylan USA 1.6x 7.0x NA 2.0x 6.6x 15.4x -31%
Perrigo Company Ireland 2.0x 11.8x 44.8x 1.6x 15.4x NA -13%
Endo International Ireland 2.7x 9.4x NA 2.5x 13.2x NA -90%
Zhejiang Huahai Pharma China 6.7x 45.6x 93.4x 5.2x 34.0x 81.6x 5%
Hikma Pharma UK 2.4x 8.4x 10.5x 1.6x 5.3x 8.9x -35%
Zhejiang Hisun Pharma China 2.0x 9.4x 18.1x 1.9x 12.4x 27.4x -9%
Lannett Co USA 1.3x NA NA 1.5x NA NA -88%
Mayne Pharma Australia 1.4x NA NA 1.9x 23.6x NA 6%
Median 2.0x 9.4x 31.5x 1.9x 12.8x 21.4x -34%*
TTM July'22 NASDAQ Return: -16%
Valuation Multiples
Global Generics
Global Generic companies also substantially under-performed (infact in pockets worse than Indian Pharma); a lot being
driven by the USA generic pricing pressure

As on 31st March 2020 As on 31st March 2021 As on 30th July 2022 TTM July'22
Stock
Return*
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
EV/ TTM
Revenue
EV/ TTM
EBITDA
Trailing
P/E
Indian Generics- Large Cap 2.5x 13.7x 24.0x 3.7x 16.8x 34.4x 3.5x 18.8x 30.5x -3%
Indian Generics- Mid Cap 2.1x 13.1x 14.4x 3.3x 12.9x 18.6x 2.6x 19.0x 23.2x -6%
Indian APIs 0.9x 5.6x 10.9x 3.0x 13.3x 19.1x 2.1x 13.8x 29.0x -24%
Global Generics 2.0x 9.4x 31.5x NA NA NA 1.9x 12.8x 21.4x -34%
TTM July'22 BSE Sensex LargeCap Return: 9%
TTM July'22 BSE Sensex MidCap Return: 4%
TTM July'22 NASDAQ Return: -16%
*Represents the weighted average stock returns for TTM July’22 |
Valuation Multiples
In Summary……….
The sector has been a huge under-performer over the last 12 months

Scope of Study
The main objective of the study was to analyse the trends of past 10 years for 19 listed Indian
Generics and 9 listed Indian APIs representing more than USD $ 27 Bn (INR 2,080 Bn) and USD 3.5
Bn (INR 268 Bn) of sales respectively. We believe the scale of the universe of companies chosen and
the breadth of their operations fairly represented the “Indian Pharma Industry”. We divided this
world into:
1) Indian Generics – essentially companies which derived majority of their revenues from
formulations generics
2) Indian APIs – essentially companies which derived majority of their revenues from APIs and
Intermediates

Scope of Study
Indian Generics herein is defined as companies which derive majority of their revenues from formulations *Limited
List of companies considered for the study
Considered only following companies; which represent bulk of Indian pharmaceutical revenues
▪ Sun Pharmaceutical
Industries*
▪ Dr. Reddy's
Laboratories*
▪ Cipla*
▪ Torrent Pharmaceuticals*
▪ Zydus Lifesciences*
▪ Lupin*
▪ Biocon*
▪ Alkem Laboratories*
▪ Aurobindo Pharma*
▪ Ipca Laboratories*
▪ Alembic
Pharmaceuticals*
▪ Ajanta Pharma*
▪ NATCO Pharma*
▪ Glenmark
Pharmaceuticals*
▪ J. B. Chemicals &
Pharmaceuticals*
▪ Jubilant Pharmova*
▪ FDC*
▪ Wockhardt*
▪ Indoco Remedies*
▪ Divi's Laboratories*
▪ Granules India*
▪ Laurus Labs*
▪ Shilpa Medicare*
▪ Aarti Drugs*
▪ Dishman Carbogen
Amcis*
▪ Hikal*
▪ Neuland Laboratories*
▪ SMS Pharmaceuticals*
Large Cap
Indian Generics
> USD 5 Bn Market Cap
Mid Cap
Indian Generics
< USD 5 Bn Market Cap
Indian
APIs
All Listed Companies

Revenue Trends
Indian Generics - Overall Growth
Revenue (INR Bn) & YoY Growth %
In comparison with FY21, the total sales in FY22 have grown by 9% post a miniscule 4% growth in FY 2021
However, with the opening of economy post COVID-19 & a probable better USA performance, we expect a similar 8-9%
growth for FY23
*Based on Research Reports and Candle Partners Estimates | Source –S&P Capital IQ & CP Analysis
682
851
1,025
1,257
1,391
1,494 1,512
1,696
1,835
1,908
2,080
2,260
20%
25%
20%
23%
11%
7%
1%
12%
8%
4%
9% 9%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23F*

Revenue Trends
Indian Generics - Overall Growth Compounded Annual Growth Rates (CAGR)
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Overall
10Yr 12%
5 Yr 7%
3Yr 7%
1 Yr 9%
Large Cap
10Yr 13%
5 Yr 7%
3Yr 8%
1 Yr 9%
Mid Cap
10Yr 8%
5 Yr 6%
3Yr 4%
1 Yr 9%
10 Year Long Term Growth: 8 – 12%
5 Year Mid-Term Growth: 6 – 7%
Source –S&P Capital IQ & CP Analysis

Revenue Trends
Indian Generics - Revenue from Sale of Formulations*
Formulations Growth Rate Formulations Sales as % of Total Revenue
▪ Vertical integration of the universe continues – formulations sales contribute 90% of the total revenues of the sector (vis a vis 81% in FY12); however its
been flat at those levels as several players have refocussed on their third party API sales business in recent years
81%
83%
86%
88% 88% 88%
89%
87%
90% 90% 90%
28%
25%
28%
12%
7%
0%
10%
12%
5%
9%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
*Study of 15 Indian Generics | Source –S&P Capital IQ & CP Analysis

Revenue Trends
Indian Generics - Formulations Exports*
FY22 Exports as % of total formulation sales declined in INR terms as was 65% for larger companies.
However, this reduction was largely lead due to INR depreciation as both USD and EUR appreciated by ~7-8% in FY22
31%
5%
-2%
12%
5%
-4%
12%
23%
6% 5%
38% 39%
36%
11%
6%
-2%
11% 11%
4% 3%
63%
65%
64%
60% 59% 58%
57% 57%
61%
62%
58%
62%
67%
71% 72% 72% 71%
69% 70%
69%
68%
65%
Exports
Formulations
Growth
Rate
Exports
as
%
of
Formulations
Sales
Large Cap Mid Cap

Revenue Trends
Indian Generics - Geographical Formulations Sales Mix %*
▪ USA Sales as % of total formulations for our Universe peaked at 42% in FY17 & since then there has been a consistent decline
▪ The decline of USA revenues in sales mix has been mainly compensated by India revenues (up from 27% to 32%) and ROW (20% to ~23%)
▪ We expect that in FY23, RoW would have contribute to a larger % of total formulations compared to previous years. USA would continue to under-perform for
sometime, however, India as % of total formulations would increase further
32
36
39
36
41 42
37 37 36 35
33
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
31
29
26 27 27 27
28 29 28 29
32
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
24
25 25
23
20 20
22 22 23 23 22
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
12
10 10
14
12 12
13 13 13 13 13
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
USA India RoW Europe

Revenue Trends
Indian Generics - Geography-wise Growth Contribution*
▪ India and ROW has reported the highest growth rates in the
last 5 years followed by Europe
▪ USA has been the most under-performing geography with
almost nil growth over a 5 year period
Geography-wise 5 Year CAGRs
7%
0%
11%
6%
9%
2%
11%
9%
RoW
USA
India
Europe
INR Terms Local Currency Terms

R&D
Revenue & Capital R&D
R&D as % of Total Revenue
▪ After a period of 5 years of high allocation upto FY 2017, Large Caps have been consistently cutting down on R&D spends which are now at FY 2012 levels
(6%)
▪ Both, Large Caps and Mid Caps spent sizeable amounts in R&D in the phase FY14 to FY17 with R&D as % of sales peaking at 9% for both
▪ This saw a trend reversal in FY17. We expect this to be a lower number in FY23 as R&D productivity is a key issue for the sector to drive profitability in the
future years
*MidCap R&D Expense for FY22 includes only 4 companies hence may not be comparable with previous years | Source –S&P Capital IQ & CP Analysis
6
6 7
8
8
9
9
7
6 6 6
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Large Cap
5
5
6 6
8
9
8 8
7 7
5
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22*
Mid Cap

Profitability Trends
Indian Generics
USA’s pricing pressure had dented the profitability margins for Large Caps & Mid-Caps
While EBITDA margins peaked at 28% in FY 2014, it is now in the range of ~21%
EBITDA
Margins
%
PAT
Margins
%
Mid Cap
22
25
21
17
19 18 17 18 19
23
19
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
11
14
11
8
11 10
9 10
11
17
10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
16 16 16 15 16 15
9 10 10
13
9
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Large Cap
25 26
28
24
26
24
21 21 19
22 21
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22

Working Capital Position
Indian Generics
Net Working Capital Days
▪ The Average Cash Conversion cycle has increased for Large Caps in FY22; primarily due to a decrease in Current Liabilities. With increased pressure now on
cash flows, we believe FY23 may see some improvement in the working capital cycle. However at 151 days (ie approx. 5 months) the average capital blocked
by the industry in working capital is a cause of concern and probably is a leading indicator of tepid demand
Mid Cap
117 days
108 days
116 days
111 days
134 days
129 days
FY17 FY18 FY19 FY20 FY21 FY22
Large Cap
171 days
181 days
167 days
148 days
142 days
151 days

Capex Investment
Indian Generics
Capex Investment as % of Gross Block
▪ Indian pharma invested heavily in capex in the period FY15 - FY18
▪ In the last 3 years however Capex Investment (as % of Gross Block) is at an all time low demonstrating that the industry is still dealing with excess capacities.
The low growth of USA markets possibly explains the low investment in capex
Large Cap
17
14
13
16
30
25
16
15
10
9
10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Mid Cap
15
14
13
15
18
16
19
17
12
11
9
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22

Leverage Ratios
Indian Generics
▪ The resultant low growth and lower capex has resulted in improvement in leverage ratios for the industry
▪ Over the last 4-5 years, Large Caps have improved their balance sheets significantly. Debt (as % of total capital) has declined to 17% from a peak of 31%
*Excluding Wockhardt Ltd | Source –S&P Capital IQ & CP Analysis
Debt
as
%
of
Total
Capital
Debt
/
EBITDA
Multiple
(x)
Large Cap
1.0x 0.9x 0.9x
1.2x 1.3x 1.5x
2.2x 2.1x
1.8x
1.2x 1.0x
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
23 23 23 26 28 27 31 31
27
21 17
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Mid Cap
2.5x
1.8x 2.0x
2.7x
2.2x 2.4x 2.3x 2.2x 2.0x
1.2x
2.0x
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
51
44
41 43
38 38 36 35 33
24
32
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22

Return on Capital Employed
Indian Generics
▪ The ROCEs of our universe peaked in FY13 - FY14
▪ The low ROCEs for large caps (last 4 years) is because of higher exposure to USA business and sharp increase in capex & R&D investments made in the
previous years
▪ We do not expect peak ROCEs of 26% to return back in near future. However, the sector should return to levels of 16-17% ROCE by FY25
Return on Capital Employed %
Large Cap
21
23
26
22
20
16
11 11 10
13 13
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Mid Cap
18
23
18
13
16
14
13 13 13
16
12
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22

Indian API Industry Trends
We analysed similar long term (10 year) trends for the Indian API Industry &
the analysis showed some interesting contrasting trends compared to the
formulation (generic) companies

Revenue Trends
Indian APIs
14%*
10 Year
15%
5 Year
17%
3 Year
10%
YoY
FY2020
27%
YoY
FY2021
16%
YoY
FY2022
Sales CAGRs YoY Growth Rates
Revenue (INR Bn) & YoY Growth %
60
75
95
109
124 131 137
166
183
232
268
26%
25%
28%
15%
13%
6%
5%
21%
10%
27%
16%
*Excluding Laurus Labs | Source –S&P Capital IQ & CP Analysis
FY 2019 – FY 2022 has been a golden period for Indian API Industry with all parameters showing contrasting trends compared to formulation businesses….

Profitability Trends
Indian APIs
The Indian API universe continues to do well with EBITDA margins of 28% (20% without Divi’s) & PAT margins of 18% (10%
without Divi’s). Contrast this to 21% for formulation generics universe suggests that API as a sector is emerging as a clear
out-performer in recent times
24% 24% 25%
23%
25% 26%
23% 24% 24%
29%
28%
18% 18% 19%
17%
20% 21%
20%
18%
20%
24%
20%
FY12* FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
12% 13% 14%
13%
15% 14%
12%
14% 14%
17% 18%
5%
7% 8% 7%
8% 9%
8% 8%
9%
13%
10%
FY12* FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
EBITDA Margins %
PAT Margins %
Indian APIs Indian APIs (excluding Divi’s Labs)
*Excluding Laurus Labs | Source –S&P Capital IQ & CP Analysis

192
215
184
170
141
173
142
155
140
136 133
138
Capex Investment and RoCEs
Indian APIs
Working Capital Days Capex Investment as % of Gross Block*
14%
17%
22%
17% 15% 14% 15%
18% 19% 19% 18%
18% 19%
22%
19%
21%
17%
12% 13% 14%
20% 19%
12%
13%
16%
13%
16%
12%
9% 8%
10%
16%
12%
In contrast to formulation generics universe, API sector has been a consistent performer with ROCEs in the range of 19-20% and capex (as % of
Gross Block) in the 18-19% range
Return on Capital Employed %

Leverage Ratios
Indian APIs
35% 35% 35% 33% 31%
21% 23% 21% 19% 19% 19%
50% 49% 50% 47% 45%
29% 31% 29% 27% 27% 28%
1.7x 1.6x
1.4x 1.5x
1.3x 1.2x
1.6x
1.2x 1.1x
0.8x 0.9x
3.2x
3.0x
2.5x
2.8x
2.4x
2.0x
2.5x
2.3x
1.8x
1.4x
1.8x
Debt as % of Total Capital
Debt / EBITDA Multiple (x)
Leverage has been maintained over last 4 years; in line with similar trends seen in the last slide of consistent investments in capex

Prognosis – FY 2023-FY 2024
We are optimistic that growth would come back by next year aided by better regulated
market performance and renewed focus we are seeing now on domestic market. Also the
ongoing cost rationalisation exercises across companies would lead to a 2-3% incremental
EBITDA margin. However the markets would need to see validation of the same before it
rerates the sector

Prognosis – FY 2023 – FY 2024
Substantial refocus on the India growth story by most large companies in FY 2022/FY 2023 – There has
been a surge in domestic formulations M&A over the last 9 months. Deals worth ~Rs 4,000 crore have been
executed and based on media reports there maybe deals worth another Rs 6,000-7,000 crore in the pipeline. As
integration benefits percolate, we will see additional EBITDA margins benefits in the domestic businesses.
Lure of USA Market has waned to some extent – On the back of successes of the likes of DRL and Lupin,
several mid-sized Indian pharma invested in USA as a geography in 2013-2018. Learning from under-
performance of even the leaders has made several companies refrain from undertaking fresh investments
Efficiencies of better utilisation of assets will kick in soon – we think the exuberance of incurring large capex
in the phase FY 2015-FY 2018 has waned & pharma entrepreneurs have been more judicious before incurring
regulated market capex. There is still sizeable over-capacity in solid dosages in India & the recent lower capex
investment augurs well for ROCEs going forward.
Incremental captive investments in API assets would play out soon – the out-performance of the API industry
& China+1 demand has made several companies increase their investments in APIs & some of them have created
separate companies / subsidiaries with professional management.
Private equity capital increasingly playing key role in ownership – Several large PEs are keen to do control
deals in the industry (like JB Chem / KKR). We already have seen three API platforms being created. Under
professional managements, these businesses will aggressively chase growth and one can expect better financial
performance.

© 2022, Candle Partners Private Limited. All Rights Reserved. Candle Partners and the Candle Partners Logo are trademarks of Candle Advisors Private Limited. This work may not be used, sold, transferred, adapted, abridged, copied or
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