The Indian pharma sector is poised for stronger growth this fiscal, with revenue set to rise 11-13 per cent compared with eight per cent last fiscal. Export momentum will provide the much-needed lift to the sector, plus a healthy domestic demand. As per the latest report by CRISIL Ratings, the growth spurt is unlikely to flow through fully to earnings, as inflation in raw material, energy and freight costs is expected to compress operating margins by 150-200 basis points (bps).
But strong cash generation, liquidity and healthy balance sheets are expected to keep the sector’s credit profiles resilient.
The CRISIL report points out that the Indian pharma sector is dominated by generic drugs and the sector derives almost equal revenue from domestic and export markets. Drug formulations by Indian pharma companies account for about 83 per cent of exports, and of these, around 57 per cent are shipped to regulated markets and the remainder to semi-regulated markets. As per the report, a diversified geographic footprint is becoming a key growth lever.
“Export growth is broadening beyond the US. Complex generics and biosimilars are expected to deepen the sector’s presence in Europe, while branded generics and new launches will accelerate growth across Asia, Africa and Latin America. In the US, differentiated product launchesand inventory normalisation should partly offset continuing pricing pressure. This broader market and product mix will be the principal driver of export growth, which is projected at 14-16 per cent in rupee terms this fiscal,” remarked Sehul Bhatt, Director, Crisil Intelligence.
Besides the export upswing, the domestic market is expected to provide a solid growth engine to the sector, expanding 9-11 per cent this fiscal. Chronic therapies are expected to remain the key growth driver, supported by the rising prevalence of lifestyle-related ailments. The Indian pharma market will also benefit from annual price revisions of 5-6 per cent and a recovery in volume growth to 4-5 per cent, compared with around 2 per cent in each of the past two fiscal years. The improvement in volumes will be driven by new product launches, stronger prescription demand, improving field-force productivity and deeper penetration into tier-2 and tier-3 markets.
As per experts from CRISIL, higher energy, freight and feedstock costs amid geopolitical volatility in West Asia will outweigh near-term gains of the sector from rising operating leverage and a richer product mix. There could be further challenges including further spikes in input and freight costs, potential US tariffs on pharmaceutical exports, sizeable debt-funded acquisitions and related integration delays, as well as unresolved regulatory issues.
