The Indian bulk drugs (also called as active pharmaceutical ingredients or APIs)¹ segment of the pharmaceutical sector will see revenue grow 6-8% this fiscal, helped by higher sales volume stemming from stable growth outlook for formulations across markets. The bulk drug segment had posted 8-10% revenue growth last fiscal, mainly because of better realisations and a sharp depreciation in the rupee, which lifted exports. This fiscal, realisations are seen range-bound.

Credit profiles of bulk drug manufacturers are seen to remain ‘stable’, supported by healthy annual cash generation and adequate balance sheets, despite some uptick in debt-funded capital expenditure (capex), benefits of which will accrue over the medium term. A CRISIL study of 55 bulk drug makers, which accounted for over 20% of the ~Rs 1.35 lakh crore segment’s revenue last fiscal, indicates as much².

To be sure, market size is a combination of domestic consumption (by formulation companies contributing to three-fourths of the segment’s revenue) and exports of bulk drugs (equal contribution from the regulated and semi-regulated markets).

Adds, Aditya Jhaver, Director, CRISIL Ratings, “Domestic bulk drug consumption is expected to grow 5-7% this fiscal, given increasing prevalence of chronic diseases and continued emphasis on health awareness. Exports are seen rising 7-9% in rupee terms, driven by volume from new launches, customised synthesis, growing demand for complex drugs and abating price pressure in the US. This will translate to overall 6-8% growth in revenues for bulk drug makers”.

India imports almost a third of its API requirements. API imports were upwards of Rs 35,000 crore in fiscal 2023, two-thirds of which were from China. After supply-chain disruptions last fiscal, China’s supplies of APIs are gradually normalising this fiscal and prices are moderating, which could lead to higher imports and pose some downside risk to revenue growth for domestic bulk drug makers.

The good part structurally is that import dependence is expected to somewhat reduce over the medium term, as domestic production increases gradually because of capital spending under the Production Linked Incentive (PLI) scheme. Of the originally envisaged capex commitment of ~Rs 6,500 crore under the PLI scheme for bulk drugs, domestic companies have already committed ~Rs 4,100 crore.

Says Aniket Dani, Director, CRISIL Research, “A large portion of the upcoming capacity is for two key APIs: para-amino-phenol and penicillin, which, once commissioned and ramped up, will be sufficient to almost entirely replace imports for these products. At the aggregate level, too, new capacities under the PLI scheme will help reduce import dependence for bulk drugs by ~one-fifth.”

Operating profitability for bulk drug/API manufacturers is seen up by ~100 basis points (bps) to 18-19% this fiscal, with easing of supply issues globally leading to lower prices of ‘key starting materials’ or KSMs. Lower freight costs and economies of scale will help, too. This comes after two consecutive years of margin contraction, which took operating profitability back to the pre-pandemic levels of 17-18%.

Working capital needs are sizeable because of substantial inventory of KSMs and drug intermediates, which are largely imported. The same also applies for stock of finished products, given the substantial exports across multiple regions.

Large working capital requirement and uptick in capex will necessitate additional borrowings. However, supported by better profitability, the debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio of companies analysed is seen healthy at 1.3-1.5 times this fiscal and the next, almost similar to fiscal 2023. Interest coverage ratio too is seen at healthy levels of over 7 times as well, despite higher interest rates

In the road ahead, significant fluctuations in the prices of raw materials imported from China and progress of projects under the PLI scheme will bear watching.

¹ Bulk drugs are also called APIs and are the primary active ingredients of a pharmaceutical product, produced in the first stage of production and usually in bulk quantities. Formulations, on the other hand, are the final pharmaceutical product, sold to consumers.
² Backward integration by large pharmaceutical formulation players into bulk drugs (for own consumption as well as external sales) form a sizeable portion of the segment’s revenue, which has not been included in the assessment due to limited data availability.