Big Indian pharmaceutical companies¹ are expected to return to double-digit growth this fiscal riding on a dynamic troika of recovery in sales in the US, depreciation of the rupee against the dollar, and improving domestic demand.

After two years of single-digit growth, revenue this fiscal is estimated to grow 10-12%, lending stability to profitability and helping drug-makers weather a sharp rise in input costs.

Green shoots were already visible in the first quarter for 20 of these listed drug-makers, which account for three-fourths of the sector’s revenue. The US and the domestic markets contribute on average 30% and 35%, respectively, of their revenues.

“The US market is witnessing an upturn after de-growth in five of the past eight quarters through June 2018. Revenue from that geography grew 7% on-year in the first quarter of fiscal 2019, compared with a muted outing in the same quarter of fiscal 2018,” said Anuj Sethi, Senior Director, CRISIL Ratings. “We expect 6-7% growth this fiscal, backed by lower intensity of regulatory issues, faster product approvals and improving share of complex products. This will also help offset pricing pressure faced in existing products.”

Better domestic demand will complement the recovery in US sales. Domestic revenues of big pharma companies is expected to grow 12-13% this fiscal, given better access to healthcare and deeper penetration of health insurance. The recovery is already reflected in the first quarter with the domestic segment growing 25% on-year, albeit on a low base, as the first quarter of the previous year was severely impacted by retailers destocking ahead of the goods and services tax implementation.

This augurs well for operating margins, too.

“Revenue recovery in the key markets will offset the sharp increase in costs on account of a shortage in the supply of key ingredients from China,” said Sameer Charania, Director, CRISIL Ratings, “That, along with depreciation of the rupee and cost optimisation measures, will enable big companies to sustain operating margin at 18-20% this fiscal.”

The credit profiles of big pharma companies is likely to remain stable, supported by well capitalised balance sheets. The debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of these companies stood at 1.3 times in fiscal 2018 and is expected to improve to around 1 time this fiscal.

Volatile input prices and currency, as well as acquisitions, remain key monitorables.

¹Companies with turnover of Rs 1,000 crore or more