Down 40% since IPO, is Akums Drugs finally a bargain?

Akums Drugs & Pharmaceuticals began operations in 2004 inside a single rented shed on the outskirts of Haridwar, cranking out cough syrups for household names that did not want the hassle of running their own plants. Two decades later, Akums is a behemoth. It is India’s largest finished-dose contract developer and manufacturer (CDMO) by volume with 10 factories, nearly 5,000 crore formulation units across tablets, capsules, syrups and a client roster that includes most Indian and many multinational brands.

However, that hasn’t helped the stock, which is down 40 per cent since listing in August last year. Why? In terms of profitability, Akums is still a lightweight. Its FY25 EBITDA margin of 11 per cent pales in front of the 24-35 per cent peers like Divi's Laboratories, Syngene International and Gland Pharma routinely post.

That stubborn gap has kept investors puzzled. The stock still trades at 27 times FY25 earnings—much cheaper than Syngene’s 55x and Divi’s 80x. Valuation debates ultimately converge on two questions: why are Akums’ margins so low and, more importantly, can they move high enough to justify a sustained re-rating?

Why margins are low

Akums has built its business on plain-vanilla formulations—paracetamol, vitamin blends, routine antibiotics—manufactured under cost-plus contracts for nearly every big‐name Indian brand. The model is a textbook volume play: clients pay Akums the cost of raw materials plus a fixed conversion fee. When active ingredients (APIs) become cheaper, Akums dutifully passes the saving back; when they spike, it gets reimbursed. The system guarantees capacity utilisation but also locks Akums into thin, largely immovable spreads. Besides the pricing model, the company’s primary focus on generic products also restricts how much it can charge, setting a ceiling for margins. Divi’s, by contrast, sells niche, patent-protected APIs and its pricing model allows it to pocket every efficiency gain unlike Akums.

The bigger culprits

Despite just an 8 per cent share in revenue, it’s the active pharmaceutical ingredients and trade generics segments that are the biggest margin drags (see table below).

The API segment, under which the company earlier sold its excess capacity via the open market, has now been expanded into a full-fledged unit. However, its margins are poor due to pricing pressures. The group’s small cephalosporin API arm has been bleeding cash since global prices collapsed two years ago as Chinese capacity flooded the market.

Low-priced trade generics, sold in India’s hinterland, are facing rising competition from regional players and a clamp-down on aggressive discounting have further pushed margins deep into the red.

A third leg—domestic and international branded formulations—does earn healthy mid-to high-teen margins, but together these higher-value labels still account for barely 14 per cent of sales, not enough to move the group needle.

Enter the management’s repair kit

Chairman Sanjeev Jain and CEO Saurabh Sethi know the numbers are unsightly, and their “Margin 15” plan has three levers:

1. Stop the bleed in APIs
   The company plans to raise API volumes so that the increased scale absorbs cost pressures. With these efforts, the management expects the API loss to halve next year and disappear in FY27.
2. Fire up new sterile blocks (high-margin complex dosage formulations)
   A brand-new injectable line in Haridwar and a carbapenem plant in Kotdwar are running below 10 per cent utilisation. Steriles typically command 18-20 per cent margins. The goal is 60 per cent utilisation by FY27.
3. Shrink or exit trade generics
   Revenue here has already fallen 35 per cent year-on-year. Pulling back is expected to save a Rs 20 crore drag.

Does the math add up?

If the API segment reaches breakeven and trade generics are winded up, the company can maintain 13.5 per cent CDMO margins at a consolidated level (in the absence of margin losses from the two loss-making segments). Assuming revenue of Rs 4,500 crore at the company’s guided capacity utilisation of 60 per cent, it would make a profit after tax of Rs 400 crore, up from Rs 343 crore in FY25—a 7 per cent two-year annual growth rate.

Valuation verdict

The first problem is that Akums isn’t there yet. A lot must go right for the above assumptions to materialise and margins to expand, and the road ahead is paved with uncertainties. Regulatory approvals are unpredictable, not least in the sterile business where even minor lapses can cause major setbacks. API prices, meanwhile, remain hostage to the volatile whims of global supply chains, especially China’s, which could defer the breakeven target.

Even in an optimistic scenario where the management succeeds in its plans—targeted operating leverage materialises and margins improve—the likely annual profit growth still comes at a muted 7 per cent only, which still fails to justify the seemingly low 27x multiple.

Disclaimer: This story is not a recommendation. Investors should do their own research before making any investment decisions.

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