Demand tonic to spur pharma growth in FY22: A CRISIL analysis

But exports to stay under the weather; credit outlook remains stable

The domestic pharmaceutical sector is expected to post healthy revenue growth of 9-10 per cent this financial year over the high base of 12.5 per cent last year (FY21). The strong pick-up in demand in the domestic formulations market, despite slower exports growth, will lead the increase.

Domestic demand is recovering steadily after a tepid performance in FY21. With normalcy returning to health care delivery services, CRISIL expects domestic formulations revenue, led by acute therapies, to grow 14-16 per cent this year compared with 2 per cent in FY21.

Demand has already increased 25 per cent in the first half, on the back of both acute and chronic segments. With ramped-up capacities and improved pace of vaccination, Covid-19 vaccines will provide additional domestic growth potential.

In FY23, domestic growth will likely moderate to 8-10 per cent.

Exports have been sluggish despite Covid-19 vaccines providing some support. Two factors are feeding the headwinds: the intense competition among generic players amid intensifying pricing pressure in the United States (US) and lower visibility of product launches due to delay in closure of regulatory actions on manufacturing plants by the US Food and Drug Administration (US FDA). Consequently, exports growth is expected to moderate to 4-5 per cent this year. 

This is in stark contrast to FY21, when exports increased by a healthy 23-25 per cent, led by the sale of Covid-related drugs and vaccines in regulated and semi-regulated markets.

In the medium term, growth in the regulated market, accounting for half of industry exports, will be supported by a steady increase in product launches and the robust specialty and complex generics pipeline of large players.

However, USFDA actions in terms of regulatory scrutiny would remain a key monitorable. Also, bulk-drug exports are expected to moderate in the near to medium term; global trade data suggests China has gained back the market share it had lost in the global bulk drugs trade during the early part of the pandemic. So, China+1 sourcing by global companies is not clearly evident as yet. Hence, exports are expected to grow 7-9 per cent in FY23.

CRISIL expects the production-linked incentive (PLI) scheme to have a meaningful impact over the medium term in improving domestic manufacturing of bulk drugs due to the estimated capex of Rs 6,500 crore. Moreover, investment of Rs 15,000 crore for research and development (R&D) in formulation products will help formulation players improve their portfolio. Cumulatively, the PLI scheme is estimated to drive Rs 21,500 crore of capex over the medium term, with an incentive-to-capex ratio of 1.

Further, the operating profitability of rated players has moderated by 300 basis points to 20 per cent this year; it is expected to sustain at the same level in FY23. This is due to a sharp increase in the prices of key starting ingredients and active pharmaceutical ingredients imported from China, along with higher freight, marketing, and travelling costs. Players have limited ability to pass on the price increase in the domestic market given the price-capping of essential drugs.

Overall, credit profiles of players will be supported by healthy balance sheets and liquidity, and remain ‘stable’ in FY22. Prudence in capital and R&D expenditure has helped sustain the debt metrics, though working capital cycles could elongate with higher receivables and extended inventory cycles amid supply-chain logjams. The credit profile of players is expected to remain ‘stable’ in FY23 as well, given the intrinsic strength of players and healthy cash-flow-generating ability.