The Indian pharmaceuticals sector is expected to log revenue growth of 8-10% in fiscal 2024, similar to last fiscal, supported by steady domestic growth and increased exports to regulated markets, even as semi-regulated markets face headwinds.

Operating profitability is also seen improving 50-100 basis points (bps) to ~21% this fiscal, supported by moderation in input and logistics costs, and abating pricing pressure in the US generics market. This follows two consecutive years of margin contraction due to high pricing pressure in the US and a sharp rise in input costs caused by supply chain disruption during the pandemic, and thereafter.

Credit profiles will remain stable owing to low-leverage balance sheets and moderate capex plans. A CRISIL study of 186 drug makers, which accounted for about half of the Rs 3.7 lakh crore annual revenue of the sector last fiscal, indicates as much.

The sector is well diversified, with almost equal domestic and export revenues. Within domestic revenues, the chronic and acute therapeutic segments contribute almost equally. As for exports, formulations and bulk drugs contribute ~80% and ~20% respectively to the total sales. Within formulation exports, sales to US (35% of revenue), Europe (17%), Asia (14%) and Africa (18%) are key contributors.

The domestic sales is expected to witness 8-10% growth in fiscal 2024. CRISIL expects the chronic segment will be the key contributor to revenues, because of the steady increase in lifestyle-related diseases and continued emphasis on health awareness, post the pandemic.

Says Aniket Dani, Director, CRISIL Research, “Similar to last fiscal, domestic growth in fiscal 2024, will be led by 5-6% increase in realisations, supported partly by high price hikes (linked to the Wholesale Price Index of previous year) allowed by the National Pharmaceutical Pricing Authority (NPPA) for drugs under price regulation2. In addition, sale of existing pharma drugs and new launches will drive 3-4% volume growth.”

Formulation exports are seen up 7-9% in rupee terms this fiscal, more driven by volumes, from new product launches, and abating price pressure in the US generics markets. On the other hand, increase in claw-back taxes in select European markets could lead to lower growth in exports to Europe this fiscal. Growth in exports to Asia will improve this fiscal, after clocking a modest growth last fiscal while exports to Africa will continue to remain sluggish on account of low forex reserves (impacting the purchasing power) and high currency volatility.

Lower input prices and normalisation of supply chains should cull inventories to pre-pandemic levels, resulting in smaller incremental working capital debt this fiscal.

Says Aditya Jhaver, Director, CRISIL Ratings, “Better profitability and lower working capital needs will further strengthen the balance sheets and liquidity of CRISIL Ratings-rated manufacturers, leading to healthy debt metrics. We expect the Debt/Ebitda ratio to improve to 1.1 times in fiscal 2024 from 1.3 times last fiscal. Also, despite higher interest rates, interest coverage ratio of players is seen robust at over 9 times.”

Manufacturers are increasingly focusing on inorganic growth to diversify offerings and consolidate market share. While the strong balance sheet provide support, any sizeable debt-funded acquisition will be a monitorable.