Sluggish Exports To Cap Pharma Revenue Growth at 9%: CRISIL
Moneylife Digital Team 16 November 2021
Revenue growth of the Indian pharmaceuticals sector will moderate to 9% this fiscal, compared with a healthy 12.5% in the past fiscal. This is due to slower growth in exports, despite some support from COVID-19 vaccine opportunities and a pick-up in demand in the domestic formulations market, says a research note.
In the report, rating agency CRISIL says, “Despite some support from COVID-19 vaccine shipments, overall growth in exports is expected to moderate to 5-6% this fiscal. This is in stark contrast to last fiscal when exports had logged healthy growth of 23-25%, led by the sale of drugs and vaccines related to COVID-19 in regulated and semi-regulated markets. On the other hand, domestic demand is witnessing a steady recovery after a tepid performance last fiscal.”
A CRISIL study of 207 pharmaceuticals companies that account for 55% of the Rs3.2 lakh crore-a-year sector revenue indicates as much. 
According to the rating agency, the operating profitability of Indian pharmaceutical companies will shrink as much as 300 basis points this fiscal, due to a sharp increase in input and other costs. However, well-managed balance sheets and prudent capital spending will help keep credit quality stable, it says. 
Isha Chaudhary, director of CRISIL Research, says, “With normalcy returning to healthcare delivery services, domestic formulations revenue, led by acute therapies, is estimated to grow 14-16% this fiscal, compared with 2% last fiscal. Further, with ramped-up capacities and improving pace of vaccination, COVID-19 vaccines also provide additional domestic growth potential this fiscal.”
The Indian pharma sector is well-diversified, with exports and domestic formulations accounting for an almost equal revenue share. Exports comprise formulation sales—to regulated markets such as the US and Europe (about 45% of exports), the rest of the world (around 36% of exports)—and exports of bulk drugs (almost 19% of exports). 
CRISIL says pharma exports from India have been sluggish because of intense competition among generic players amid intensifying pricing pressure in the US market and lower visibility of new product launches due to delay in closure of regulatory actions on manufacturing plants by the US Food and Drug Administration (US FDA). 
According to the rating agency, operating profitability for players, meanwhile, is expected to come down to about 20% this fiscal due to a sharp increase in prices of crucial starting ingredients and active pharmaceutical ingredients imported from China, along with higher freight costs and marketing and travelling costs. 
Additionally, continued pricing pressure in the US and price cap for products under the drug price control order (DPCO) in the domestic market will limit the players’ ability to pass on the rise in input prices, it added.
The operating profitability of Indian pharma companies had reached a record high of 23% past fiscal. This was mainly due to cost-control initiatives and lower selling and marketing costs because of the pandemic-induced travel restrictions.
According to Tanvi Shah, associate director of CRISIL Ratings, despite the moderation in operating profitability, credit profiles of players rated by the agency would remain broadly stable, benefiting from healthy balance sheets and solid liquidity. 
“Capital spending is likely to remain moderate due to sufficient capacity, while research and development (R&D) spending will also remain stable. Debt levels are expected to increase due to higher working capital cycles, as exporters will have to contend with higher receivables and extended inventory cycles amid supply-chain logjams. Despite this, debt protection metrics will stay healthy, with the ratio of debt to earnings before interest, tax, depreciation and amortisation (EBITDA) rising to 1.3 times from just under 1 time last fiscal,” she added.
According to CRISIL, any unanticipated litigation costs in ongoing US anti-trust suits, adverse regulatory developments such as increased US FDA scrutiny, further delay in the closure of pending regulatory issues- thereby impacting launch of new products—and further price caps on products in the domestic market will be the key monitorable.
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