The revenue growth of ICRA's sample set of 16 Indian pharmaceutical companies is estimated to moderate to 6-7% in FY2023 after witnessing a Y-o-Y growth in revenues of 8.5% in Q4 FY2022 and 7.7% in FY2022 to Rs. 1.87 lakh crore. The sample set revenue growth will be supported by 6-8% YoY growth in the domestic market, 11-13% in the emerging markets and 8-10% in the European business. Growth in the US business, however, is expected to be muted at 1-3%, owing to continued pricing pressures in the generics business.

ICRA expects the OPM of the sample set to moderate to 20.2% in FY2023 from 21.5% in FY2022 given the continued pricing pressures in the US generics market and high raw material and other input costs. The extent of the impact on margins will differ from company to company depending on the product portfolio, geographic mix of revenues and diversification of vendor base. The operating profit margin (OPM) for the sample set contracted to 18.3% in Q4 FY2022 from 22.3% in Q4 FY2021 and 21.0% in Q3 FY2022.

This was majorly on account of rising costs of raw materials, other input costs such as freight, packaging among others, pricing pressures in the US generics market (which is generally the most profitable market), and inventory write-offs for Covid-19 products for a few companies in the sample. Any further impact of the ongoing geo-political issues on input prices and supply chain remain key monitorables. Given that companies in the sample set export their products and also import raw materials, forex fluctuations and impact of the same on margins will also need to be monitored.

During Q4 FY2022, the Y-o-Y revenue growth for the sample set in the domestic market was healthy at 13.5%, supported by new product launches, market share gains for some companies in the sample set, and robust performance of both chronic/acute segments. Commenting on the growth trends, Mythri Macherla, Assistant Vice President & Sector Head, ICRA, said, "Going forward, WPI-linked price hike of ~10.8% for NLEM products with effect from April 01, 2022 is expected to support growth of the sample set in the domestic market in FY2023 even as high base effect is likely to impact volumes in H1 FY2023."

As for the US market, the sample set witnessed a marginal Y-o-Y growth of 1.2% in revenues in Q4 FY2022, while revenues contracted by 1.1% on a Q-o-Q basis. This was primarily due to continued high single digit to low teens price erosion in the US generics market. Citing continued pricing pressures and high competitive intensity in the US generics business, some major pharma companies reported sizeable impairment losses in Q4 FY2022 and also announced discontinuation of some products/segments due to reduced earnings potential. While Indian pharma companies continue to focus on new product launches, complex generics, including first-to-file opportunities to improve margins for the US business, mid to high single-digits price erosion will exert pressure over the near term.

The emerging markets witnessed a healthy Y-o-Y growth of 14.3% in revenues in Q4 FY2022, although revenues were marginally lower by 2% on a Q-o-Q basis. Overall growth for FY2022 was healthy at 17% on a Y-o-Y basis and was broad-based, spread across all key regions. This was driven by new product launches, low base, strong demand and depreciation of the INR against certain currencies.

ICRA expects the research and development (R&D) expenses to stabilise at current levels of 7-7.5% of revenues for its sample set as companies continue to focus on complex generics, first-to-file opportunities and specialty products, which entail higher R&D expenses. Stable investments in R&D to develop such products will support growth and margin improvement over the medium term. 

Commenting on estimated capex spends going forward, Deepak Jotwani, Assistant Vice President & Sector Head, ICRA said, " We expect the sample set to maintain annual capital expenditure (same as in FY 2022) run rate of Rs. 15,000 crore in FY2023 and FY2024, supported by investments in the PLI scheme in addition to regular expansion and maintenance capex. Capex in FY2022 was towards capacity expansions, maintenance capex, and some deferral of FY2021 capex due to the pandemic."

The outlook for the Indian pharma industry remains Stable led by expectation of continued healthy revenue growth and margins. ICRA expects the sample set's capital structure and coverage indicators to remain comfortable despite higher capex and R&D expenses given the robust liquidity profile.