UPL, PI Industries, SRF, Tata Chemicals, Rallis India and Dhanuka Agritech - Haitong highlights bright prospects in Agro-chemical sector

Recent global events have forced large agro-chemical and pharmaceutical players to re-think about their heavily skewed supply chain currently in favor of China. Additionally, increasing cost pressures and reducing R&D (Research and Development) productivity has brought Indian CDMO (Contract Development and manufacturing organisation) companies under the spotlight. 

To understand the potential opportunity emerging through de-risking supply chains and reallocations, Haitong hosted an industry veteran specializing in CDMO business. Through this report they highlight key takeaways from the expert, profile of Indian and Chinese CDMO players and insights from largest CDMO player Saltigo GmBH.

CRAMS (Contract Research and Manufacturing Services)/ Outsourcing Industry Background:

The Agrochemical and pharmaceutical industry has been struggling with decreasing R&D productivity, reduced rate of approvals, and absence of blockbuster products driving companies to focus on cost and identify core areas to focus on. This has also led to outsourcing of various activities along the value chain to Contract Manufacturing Organizations (CMO) and Contract Research Organizations (CRO). Outsourcing is expected to have a positive impact on the flexibility and efficiency of agrochemicals and pharmaceutical players, costs are reduced by turning fixed into variable costs and removing assets off the balance sheet. While commodity services have been the focus in the past, today value added services such as design, delivery, process development, and optimization techniques are increasingly demanded by the industry. Global CRAMS market is expected to grow at a CAGR of 10% up to FY24 on the back of increasing trends in contract manufacturing and innovators shifting production to low cost destinations.

CMO vs CDMO

CMO companies provide production services according to the process route provided by the client. For CDMO, it is no longer a simple outsourcing and processing mode, but to provide customers with technological innovation, process optimization, and integration. The focus is on supporting services to help customers save costs to the utmost extent, which is relevant to the company’s innovation, synthesis, and management capabilities. The three core reasons for choosing R&D outsourcing are to shorten the R&D cycle, improve operational efficiency, and reduce comprehensive risks.

Annual new opportunity size of U.S. $400 mn:

The global agro-chemical market size is about U.S. 60 bn growing at an average of 3-4% annually. The active ingredients (AI) market size is about 20% i.e. U.S. 12 bn of the agro-chemical market which essentially is the outsourced / potential opportunity for CDMO players worldwide. Thus, new opportunity size every year is likely to be approximately U.S. $400 mn. Global innovators like Bayer crop and BASF currently outsource the majority of their production whereas Syngenta has a strategy to outsource 70-80% of its production while Corteva is likely to increase its outsourcing which could be a big opportunity. The de-risking China strategy is likely to benefit Indian CDMO / CMO players.

Re-allocations to boost opportunity size:

The expert highlights that generally, after the discovery and launch of a new product the production of AI’s and intermediates is withheld by the innovator for 3- 5 years and later outsourced to European CDMO players due to IPR safety, complexity and ease of communication. As the product nears the patent expiry, it is considered to outsource to either to Chinese or Indian players due to cost factors. However, due to increased cost pressure there is likely to be a trend of reallocation from European players which shall benefit Indian players.

Recent trends provide strong visibility of 20%+ multi-year growth:

The Indian agro-chem CDMO /CMO industry is about U.S. 1-1.2 bn with a handful of players in the space. Based on above trends, Indian companies can achieve 20%+ growth for many years to come. Some of the R&D driven Indian CDMO companies like PI Industries, and SRF have established themselves as credible players and have made inroads into global innovators. Additionally, they have comfortable balance sheet position to capture the growth opportunities through capex.