India’s pharmaceutical sector will log a moderate revenue growth of 7-9% this fiscal, similar to the last fiscal, due to headwinds in export sales in the regulated markets and high-base effect in the domestic formulations business.

Operating profitability will shrink another 200-250 basis points (bps) after the 130 bps decline last fiscal due to continued pricing pressure in the US generics market, and high input and freight costs which offset moderate revenue growth. Even so, credit quality of pharmaceutical players will be stable owing to low-leveraged balance sheets and moderate capex plans, a Crisil study of 184 drug makers that account for ~55% of the Rs 3.4 lakh crore-a-year sector revenue indicates as much.

The sector is well-diversified, with domestic and export sales commanding an almost equal revenue share.

The domestic formulations market is expected to grow 7-9% this fiscal, on a ~15% growth last fiscal, led by a 6-8% average price increase as allowed by the National Pharmaceutical Pricing Authority in March 2022 for the drugs covered under the Drug Price Control Order, and on the back of new product launches. While the demand for Covid-19 induced drugs and vitamins is fading, a pickup in lifestyle-related chronic portfolio drugs and a few acute portfolio drugs, such as in the dermatology and ophthalmology segments, is likely to drive demand this fiscal.

As for exports, formulations and bulk drugs contribute ~81% and ~19% respectively to the total sales. Further, formulation sales to regulated markets and the rest of world (ROW) markets contribute almost equally to the revenue. The export formulations market remained flattish in fiscal 2022 on a higher base of previous fiscal.

Says Aniket Dani, Director, Crisil Research, “Formulation exports could grow 6-8% this fiscal, driven by 11-13% growth – in rupee terms – in the semi-regulated markets. The growth in US generics market will moderate given continued pricing pressure. The rupee’s depreciation saves some blushes, though. Exports to other regulated markets could grow faster as global companies diversify geographically.”

Bulk drug exports are expected to grow 9-11% in rupee terms this fiscal, compared with 1-2% last fiscal on a higher base, as formulation players seek to diversify sourcing and reduce their dependence on China. The transition towards custom synthesis and the specialty segment will improve realisations of players, potentially supporting growth further in the medium to long term.

Further, operating profitability is expected to moderate by 200-250 basis points (bps) to ~19.5-20% this fiscal due to continued high prices of key starting materials and bulk drugs imported from China, along with higher freight costs. Additionally, continued pricing pressure in the US could limit the players’ ability to pass on the rise in input prices. Nonetheless, the high price hike in the domestic market should arrest any further decline in operating profitability of players.

The high input prices coupled with players maintaining increased inventory levels to circumvent any production disruption on account of supply-chain issues will lead to higher working capital debt for the players this fiscal.

Says Tanvi Shah, Associate Director, Crisil Ratings, “Despite the moderation in operating performance and higher working capital needs, credit profiles of rated players will remain stable this fiscal, benefitting from strong balance sheets and healthy liquidity. We expect debt protection metrics should stay healthy, with debt/Ebitda rising to 1.1 times from 0.8 time last fiscal. Also, despite the rising interest rate environment, the sector’s interest coverage ratio will continue to remain healthy at over 12 times this fiscal.”

Any unanticipated increase in litigation costs in ongoing US anti-trust suits, sizeable debt-funded acquisitions, adverse regulatory developments such as increased US Food and Drug Administration import alerts, further delays in the closure of pending regulatory issues — thereby impacting the launch of new products — and further price caps on products in the domestic market will remain the key monitorables.