Pharma-Linked Chemical Makers Defy Sector Slowdown
In a notable shift within India's chemical industry, companies supplying the pharmaceutical sector are emerging as clear outperformers. An analysis of September quarter results reveals that a group of 10 speciality chemical manufacturers linked to pharma and Contract Development and Manufacturing Organizations (CDMOs) achieved approximately 7% year-on-year growth in sales. This robust performance significantly outpaced the modest 4% uptick managed by their non-pharma counterparts, highlighting a decisive market trend.
Why CDMO Suppliers Hold the Advantage
Market experts point to several structural advantages driving this divergence. Suppliers to pharma companies and CDMOs benefit from clearer growth visibility, less intense competition, and stronger margins compared to businesses focused on industrial or agro-chemicals. According to Vikash Agarwalla, Managing Director and Partner at Boston Consulting Group, the intermediates required for new chemical entities involve complex synthesis and rigorous regulatory oversight. This creates high barriers to entry and fosters significant customer loyalty, as speed and reliability become more critical than cost.
Deepak Jain, CEO and Managing Director of Jubilant Ingrevia, described it as a "game of patience." Companies often secure contracts during the early drug discovery phase and grow alongside the molecule's development, resulting in a high-margin, sticky business with superior pricing power.
Earnings Analysis and Growth Drivers
The financial data underscores this narrative. While the broader speciality chemicals sector grapples with global pressures, pharma-linked firms saw their net profit surge by 46% on-year in the September quarter, albeit partly aided by higher non-core income. In contrast, the non-pharma group managed only a 9% rise in net profit.
This performance gap is largely attributed to India's rapidly expanding CDMO ecosystem. A report from Nuvama Institutional Equities noted that the CDMO segment was the fastest-growing in its pharma portfolio, expanding by 23% year-on-year in Q2. Key players like Neuland Laboratories, Divi’s Laboratories, and Jubilant Pharmova posted impressive growth in their contractual service businesses.
Several powerful tailwinds are supporting this growth:
- Geopolitical Shifts: Initiatives like the revived US Biosecure Act could redirect business from China to India.
- Supply-Chain Diversification: Global companies are seeking to reduce reliance on single-source geographies.
- Cost Competitiveness: India's improving cost structure is attracting more international pharma business.
With India currently holding just 2-3% of the massive $145 billion global CDMO market, Boston Consulting Group's Agarwalla sees ample room for expansion. He projects 15-20% annual growth for the domestic CDMO space through 2035.
Contrasting Fortunes in the Broader Chemical Sector
While the pharma-linked segment thrives, the wider speciality chemicals industry faces significant headwinds. Swarnendu Bhushan, Co-head of Institutional Research at PL Capital, highlighted multiple challenges:
- US Tariffs: The Trump administration's 50% tariffs on certain organic chemicals have eroded India's price competitiveness.
- Chinese Oversupply: Agrochemical plants in China are operating at just 60-65% capacity, flooding the market and depressing prices.
- Weak European Demand: Soft industrial and construction demand in Europe is worsening the sectoral slowdown.
These factors are keeping margins under pressure for commodity-style and industry-linked speciality chemicals.
Future Outlook and Expansion Plans
Despite the positive momentum, a note of caution remains. PL Capital's Bhushan pointed out that volumes from the CDMO sub-segment are still relatively small, and margins are dependent on scaling up these quantities. Furthermore, not all pharma intermediate suppliers participate in the high-margin CDMO space; those tied to generic intermediates often clock lower, mid-teen margins and remain vulnerable to foreign dumping.
However, the strategic shift towards pharma is unmistakable. Companies are actively building their pipelines. Jubilant Ingrevia, for instance, has a pipeline of over 10 new molecules across speciality segments like pharma, cosmetics, and agrochemicals, expected to add ₹1,200 crore in peak annual revenues. The company plans to add 10 more molecules to this pipeline in the next 6-9 months.
Other players, such as Acutaas Chemicals, are also reportedly upbeat about their CDMO pipelines. As Vikash Agarwalla concluded, "CDMO-linked intermediates offer a far more resilient path in a chemicals sector struggling with global price pressure and uneven demand." The patience required for this segment appears to be yielding substantial rewards for those who have placed their bets.
