The pharma and healthcare indices have outperformed the benchmarks and broader indices, with a return of about 20 per cent over the past six months. While most sub-segments, such as diagnostics, hospitals and pharmaceuticals, have done well, listed majors in the contract development and manufacturing organisation (CDMO) space have been the stars of the returns chart, beating their health care and pharma peers by a wide margin.

Led by Laurus Labs, which delivered a 90 per cent return, the top five listed players, which get at least 40 per cent of their revenue from the CDMO segment, have delivered an average return of over 60 per cent over this period.

Rising outsourcing and supply-chain rebalancing initiatives by global pharmaceutical and biotech companies continue to be a major trigger driving the growth of Indian CDMO majors.

Going ahead, brokerages expect growth momentum to continue, given the rising share of biologics funding, a healthy pipeline of biosimilar opportunities and rising demand for peptides. While prospects remain strong, what could weigh on returns going ahead are valuations, at 66 times FY27 price-to-earnings on average for the top players, which factor in some of the growth gains after a sharp rally.

Even as the core pharma sector exhibited a mixed picture, with strong domestic formulations and a weak US generics market in the June quarter, major players in the CDMO segment saw a strong performance, with top players reporting over 20 per cent growth in revenue and a 60 per cent rise in operating profit.

The CDMO sector reported another quarter of double-digit year-on-year (Y-o-Y) revenue growth in Q1 FY27, highlighting the continued strength of underlying demand, despite a few companies facing temporary headwinds from customer destocking and product attrition, points out India Ratings and Research.

It expects the sector’s healthy growth momentum to sustain through FY27, supported by robust enquiry pipelines from global innovators, improving capacity utilisation levels and ongoing capacity expansion initiatives.

Furthermore, as recently commissioned capacities scale up, companies are well positioned to benefit from operating leverage and improved asset monetisation. The next growth phase will be increasingly driven by execution excellence and the successful commercialisation of past investments, points out the credit agency.

The runway for Indian CDMO players remains strong as the segment, which currently generates revenue of $3-3.5 billion and accounts for about 2-3 per cent of global CDMO revenue of $140-145 billion, is expected to rise sevenfold to about $22-25 billion by 2035.

Supply-chain diversification is expected to benefit Indian CDMO players, with actions such as the inclusion of WuXi AppTec on the Pentagon’s Section 1260H list, as also the BIOSECURE Act, accelerating this trend.

US pharmaceutical companies, according to Deven Choksey Research, are likely to increasingly engage with alternative CDMOs, particularly in India, which offers regulatory-compliant manufacturing capabilities, strong quality standards and cost competitiveness.

In the near term, the designation, according to Abhijeet Porwal of the brokerage, is expected to drive a meaningful increase in requests for proposals (RFPs), feasibility studies and customer engagements.

Divi’s Laboratories remains the top pick in the Indian CDMO space for most brokerages, including Macquarie and JP Morgan. Macquarie Research is positive on the Indian CDMO space and believes that global pharma giant Novo Nordisk’s manufacturing pivot reinforces the peptide CDMO investment case.

Given the surge in demand for GLP-1 weight-loss drugs, Novo Nordisk, which used to manufacture complex peptide-based active pharmaceutical ingredients in-house, is now outsourcing a significant part of its production to CDMO players.

Way2Wealth Brokers has an accumulate rating on Laurus Labs and Sai Life Sciences, driven by increasing global outsourcing, capacity expansion and differentiated technology platforms.

While Divi’s continues to generate industry-leading margins and Syngene International remains a stable player in the sector, both trade at relatively rich valuations, says the brokerage. Piramal Pharma and Akums Drugs and Pharmaceuticals are in the early stages of margin improvement, it adds.