>Contract Research and Manufacturing Services (CRAMS) companies

The Indian Contract Research and Manufacturing Services (CRAMS) companies are on the threshold of a significant opportunity given the expected increase in pace of outsourcing
from India.

■ Inventory de-stocking coming to an end: We expect the adverse impact of global inventory de-stocking (undertaken by customers) to correct gradually from FY11 onwards as the underlying demand for pharmaceutical products has remained intact despite the global slowdown. Most of the Indian CRAMS players have recently indicated that there will be increased trend towards outsourcing in FY11.

■ Macro environment favourable for increased outsourcing: We expect a significant traction in the global outsourcing business given the low R&D productivity and intense pressure on the global innovators to generate growth. A large portion of this outsourcing business is likely to be sourced from Asia (mainly India and China).

■ Entry barriers are high: Given the significant entry barriers in this business, we expect existing players to get a disproportionate share of the business.

■ India is on the threshold of a big opportunity: India's market share in the global contract manufacturing business is likely to more than double to 7% in 2007-2012 while supply revenues will grow from US$800m to US$3b, giving rise to a significant opportunity for well-established CRAMS players.

■ Demonstrated skills for CRAMS: We believe that some of the Indian companies have demonstrated strong chemistry and regulatory skills coupled with IPR compliance and low manufacturing costs — the prerequisites for building a successful CRAMS business.

■ Recommendations: We reiterate our Buy rating on Divi's Labs (17% upside), Piramal Healthcare (19% upside). Consolidation of customer base and delayed paybacks from acquired companies, which were funded through leverage, are the key risks to our positive stance.

To read the full report: CRAMS