New Delhi: India's pharmaceutical sector is poised for a stronger dose of revenue growth at 11-13 per cent this fiscal year compared to 8 per cent a year earlier, driven by accelerating exports and firmer domestic demand, according to a report by Crisil Ratings.
However, this higher revenue growth is unlikely to flow through fully to earnings as cost inflation in raw materials, energy, and freight is expected to compress operating margins by 150-200 basis points (bps) to 21-21.5 per cent, the rating agency said.
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The findings are based on an analysis of nearly 190 pharmaceutical companies rated by Crisil, which accounted for about half of the sector's revenue last fiscal year.
Despite the margin pressure, strong cash generation, liquidity, and healthy balance sheets are expected to keep the sector's credit profiles resilient. Debt-to-EBITDA for Crisil-rated companies is projected to remain around 1.2 times, while interest coverage is expected to stay close to 10 times this fiscal year.
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Export growth, projected at 14-16 per cent in rupee terms this fiscal year, will be the primary driver of revenue. Formulations account for about 83 per cent of exports, with 57 per cent shipped to regulated markets and the remainder to semi-regulated markets.
"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 launches and inventory normalisation should partly offset continuing pricing pressure," Sehul Bhatt, Director, Crisil Intelligence, said.
The domestic market will act as a solid second engine of growth, expanding 9-11 per cent this fiscal year. This will be supported by chronic therapies, annual price revisions of 5-6 per cent, and a recovery in volume growth to 4-5 per cent, compared to roughly 2 per cent in each of the past two fiscal years.
The volume uptick will be aided by new product launches, higher prescription demand, and deeper penetration into tier-2 and tier-3 markets.
"The sector's growth momentum is strengthening, but earnings will face a cost test this fiscal, with operating margins expected to moderate by 150-200 basis points to 21-21.5 per cent," Aditya Jhaver, Director, Crisil Ratings, said, adding that higher energy, freight, and feedstock costs amid geopolitical volatility in West Asia will outweigh near-term gains from operating leverage.
