Stable profits, low leverage to keep credit profiles comfortable
The Indian pharmaceuticals sector will log a revenue growth of 8-10% this fiscal, after ~10% growth last year, supported by healthy exports to regulated markets, recovery in exports to semi-regulated markets and steady domestic demand.
The resultant improvement in operating leverage along with easing pricing pressure in the US generics market will improve operating margins by 70-80 basis points (bps) to ~22.5% this fiscal. This will be on the back of an increase in margins by 100bps last fiscal.
Continued strong annual cash generation and low financial leverage, will support 'stable' credit profiles of players even as companies continue to pursue acquisitions in targeted therapeutic areas.
A CRISIL study of 190 drug makers, accounting for about half of the Rs 4.1 lakh crore market last fiscal, indicates as much.
The pharmaceutical sector revenue pie is split almost equally between domestic sales and exports. Domestic formulation revenue comes equally from chronic and acute therapeutic segments. As for exports, formulations and bulk drugs contribute ~80% and ~20%, respectively. For formulations, 58% of exports is to the regulated markets and 42% of exports is to the semi-regulated markets.
Says Aniket Dani, Director, CRISIL Market Intelligence & Analytics, "Formulation exports are expected to grow 12-14% in rupee terms this fiscal. The regulated markets of the US and Europe will witness growth of 13-15%, driven by continued drug shortages, easing pricing pressures in the US generics market and the volume uptick expected from new product launches as well as players shifting focus towards niche molecules and specialty products. On the other hand, exports to semi-regulated markets will grow 8-10% this fiscal, led by improving forex reserves, strengthening of local currencies against the dollar, and easing economic crisis in select African and Latin American countries."
Domestic revenue is likely to see growth of 7-9% this fiscal, primarily price-driven, with volume growth to be backed by new product launches. Price growth will be led by the non-NLEM (National List of Essential Medicines) portfolio, as price growth for NLEM portfolio shall remain muted, due to minimal change in Wholesale Price Index (WPI) last fiscal. CRISIL expects the chronic segment5 to be the key revenue contributor amid increasing lifestyle-related diseases and continued emphasis on health awareness since the pandemic.
Steady growth in revenues, healthy operating profits and stable working capital cycle at ~50 days will keep cash flows strong. The financial risk profile of the CRISIL-rated players remains comfortable, with debt to earnings before interest, tax, depreciation and amortisation ratio at 0.9 time and the interest coverage at over 12 times in fiscal 2025.
Says Aditya Jhaver, Director, CRISIL Ratings, "With strong cash flows and healthy balance sheets, players are increasingly focusing on inorganic growth opportunities in the API6 and the formulation space, to either diversify the product portfolios by acquiring the brands/businesses and/or to consolidate market share in the targeted therapeutic areas. While these acquisitions involve sizeable debt funding and a temporary moderation in the financial risk profile, overall credit profile continues to drive comfort from the improvement in the business risk profile, with immediate contribution accruing from acquired entities." |
