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 a high-base effect in the domestic formulations business, according to credit ratings agency CRISIL.

Operating profitability of the pharmaceutical industry will shrink another 200-250 basis points (bps) after the 130 bps decline last fiscal due to continued pricing pressure in the U.S. generics market, and high input and freight costs, which offset moderate revenue growth, shows a Crisil study of 184 drugmakers that account for around 55% of the ₹3.4 lakh crore-a-year sector revenue.

Even so, the credit quality of pharmaceutical players will be stable owing to low-leveraged balance sheets and moderate capex plans, the rating agency says.

India’s pharma 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 around 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.

“Formulation exports could grow 6-8% this fiscal, driven by 11-13% growth – in rupee terms – in the semi-regulated markets. The growth in the U.S. 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,” says Aniket Dani, director, CRISIL Research.

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.

Operating profitability is expected to moderate by 200-250 basis points (bps) to around 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, says CRISIL.

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, it adds.

“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,” says Tanvi Shah, associate director, CRISIL Ratings.

“We expect debt protection metrics should stay healthy, with debt/Ebitda rising to 1.1 times from 0.8 times 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,” Shah adds.

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