India’s CDMO sector is where IT was in the 90s, says Carnelian’s Vikas Khemani

India’s CDMO sector is where IT was in the 90s, says Carnelian’s Vikas Khemani

India’s contract drug manufacturing sector is at an inflection point, similar to where IT services stood in the mid-1990s, according to Vikas Khemani, founder of Carnelian Asset Advisors. The changing global supply chain dynamics post-COVID and a shift in boardroom thinking are creating what he calls a “10-15 year opportunity” for Indian companies.

“CDMO is where IT was in mid-90s for India,” Khemani said in an interview with N Mahalakshmi on The Wealth Formula. “Many large companies will come out of the sector.”

While analysts and investors have long debated why India’s CDMO potential hasn’t played out like IT did, Khemani believes the turning point has finally arrived. On being asked why CDMO did not take-off earlier even though it was seen as a big opportunity even at the start of the millennium,  Khemani identified the Biosecure Act and ongoing tension post-COVID between China and US as key triggers. “Post-COVID, China Plus One became real then.”

He believes India’s pharma manufacturing push, championed by the government since 2014, needed a matching shift in global demand to truly unlock capacity. “No matter how much you create supply, unless demand also gets created, it’s very hard. COVID actually accelerated that demand,” he said.

What’s different now? A spike in global inquiries for Indian CDMO services. “Today, when we talk to these companies, the kind of inquiries they are seeing in the last two-three years is unprecedented. The moment I see 100 inquiries versus 10, my confidence in everything changes,” he said.

Khemani described the current moment as a classic “chicken and egg” transition, where demand from global pharma giants is finally meeting India’s improved capabilities. “These companies have built capabilities, they’ve built capacities. So, now it’s also easier for companies to say, here’s the capacity—we can look for it.”

Khemani said the contract manufacturing space a long runway of growth ahead. “We have a long way to go,” he said. “This (CDMO business) does not come quickly, does not go back quickly. That’s the beauty of it.”

The structural nature of the opportunity, however, does not mean growth will be linear, but earnings can scale dramatically. “We used to own a company—we still own it—called Neuland. In three quarters, the story changed. What used to look like 40 P/E became 10 P/E,” Khemani said, underscoring how valuation metrics can quickly start to make sense when earnings growth is dramatic. Thus, while some CDMO stocks appear expensive on trailing earnings, he believes they’re justified on future potential. “Expensive looking at what is there right now—yes. But expensive based on what can happen is something we need to assess,” he said.