Thread by @PrasadWakchaure

Few API players showed a sudden jump in profit margins in the gone quarter. I am trying to connect the dots by comparing COVID affected the first half of 2020 with 2018 when China was cracking down pollution from end of 2017. This has led to similar supply chain disruption

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during 2018 in polluting chemical industries. The companies like Sadhana nitrochem, HEG/GI, Mangalam/Kanchi were the few to name Indian players who got benefited. See the share price of these companies after the end of 2017. The situation changed and afterward supply chain

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became normal & stock prices have gone down.

Coming to 2020, the Wuhan region in China which is a chemical production zone was affected due to COVID from mid-January. 70% Indian API & raw material comes from China, and switching on-off is not that quick in the

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pharma value chain. The Q1 was unaffected, as material supply was done probably through the available inventory with companies. Chinese companies keep excess inventory before they go on a week-long new year vacation at January end. Buyers also stock up what they need

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So the supply chain was intact mostly in Q1. The disruption happened in Q2 when inventory was finished.

So here we see sudden profit jump in some of the India API producing companies (including animal API) like Aarti Drugs & Divis and commodity companies like Balaji Amine

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Remember, actual medicine should be expensive than API, so Pharma should always get higher margins than API producing player. But here I see abnormal profit growth. Hence I relate it to the 2018 situation

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Another parallel development that fuelled this abnormal profit was the huge consumption of antibiotics (to prevent secondary infection after Corona infection) & painkillers in severe patients. Also, due to no supply for a short time (Galwan valley face off May 2020)

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led to out of compulsion buying of API locally & complete chain disruption. This has led to abnormal profit growth in companies even like Balaji amines (drop in revenue actually) who is a commodity player and can't fetch such high margins with sub-optimal capacity utilization
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Secondly, Rupee got depreciated by 8% (Rs 69 to 75) which made API import expensive (Caplin Lab, China API dependant, flat numbers) and also gave higher margins to API exporter (by 8%)

With corona easing out & supply chain disruption getting normal from China,

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a gone quarter I think was an exceptional & hence we should not extrapolate the performance of some of these companies. Rupee appreciation will play the exact opposite role and will make Indian producer expensive.
But since the west wants to remove heavy reliance on

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China, supportive role of Indian Govt, political diplomacy between Indian-US, indirect dependence of the USA on China for medicine (through India) I think few structural changes might happen.

Indian Pharma is competitive because of cheap API and

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raw material from China.

This is the same case as a solar panel where electricity cost by solar is less expensive than coal-fired plants, all credit goes to low-cost solar panels produced by China

So watch the situation & keep your bulls in control

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