India’s pharmaceutical sector is expected to see revenue growth accelerate to 11-13% this fiscal from 8% last fiscal, supported by stronger exports and firmer domestic demand, according to Crisil Ratings.
However, the improvement in revenue is unlikely to translate fully into earnings as higher raw material, energy and freight costs are expected to put pressure on operating margins.
Crisil Ratings expects operating margins to moderate by 150-200 basis points to 21.0-21.5% this fiscal.
The assessment is based on an analysis of nearly 190 pharmaceutical companies rated by Crisil, accounting for about half of the sector’s revenue last fiscal.
Exports emerge as key growth driver
The largely generics-focused pharmaceutical sector derives almost equal revenue from domestic and export markets. Formulations account for around 83% of exports, with approximately 57% of these shipments going to regulated markets and the rest to semi-regulated markets.
Crisil Intelligence expects exports to grow 14-16% in rupee terms this fiscal as Indian pharmaceutical companies expand their geographic and product mix.
Crisil Intelligence Director Sehul Bhatt said, “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 are expected to partly offset continuing pricing pressure.
Domestic market to grow 9-11%
The domestic pharmaceutical market is projected to expand 9-11% this fiscal, with chronic therapies continuing to drive growth amid the rising prevalence of lifestyle-related ailments.
Annual price revisions of 5-6% are expected to support the market, while volume growth is projected to recover to 4-5%, compared with around 2% in each of the previous two fiscals.
The recovery in volumes is expected to be supported by new product launches, stronger prescription demand, improved field-force productivity and deeper penetration into tier-2 and tier-3 markets.
Costs to pressure margins
Despite stronger revenue growth, the sector faces a cost challenge. Higher energy, freight and feedstock costs, particularly amid geopolitical volatility in West Asia, are expected to outweigh near-term benefits from operating leverage and a richer product mix.
Crisil Ratings Director Aditya Jhaver said, “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 21.0-21.5%.”
Despite the expected margin moderation, Crisil expects the sector’s credit profiles to remain resilient, supported by strong cash generation, liquidity and healthy balance sheets.
Credit metrics remain stable
Debt-to-EBITDA for Crisil-rated pharmaceutical companies is expected to remain around 1.2 times, while interest coverage is projected to stay close to 10 times this fiscal.
Key risks for the sector include further increases in input and freight costs, potential US tariffs on pharmaceutical exports, large debt-funded acquisitions and integration delays, as well as unresolved regulatory issues.