The Covid-19 pandemic is unlikely to hit credit profiles of domestic pharma companies in the near-term, despite their heavy reliance on Chinese ingredients and intermediates, says a report.
The domestic pharma industry imports almost 70 per cent of ingredients and intermediaries from China, which is the world's largest supplier market for the sector.
But if supply doesn't normalise over the next three-to-nine months, pressure on credit buffers can intensify and rating transitions would be imminent, especially those with lower ratings, and that if supply disruption lingers beyond 9-12 months, even higher rated ones will see downward pressure, India Ratings warned on Thursday.
China is the world's largest exporter of active pharma ingredients (APIs) and also intermediates.
Around 70 per cent of total API requirement of the domestic companies are met from China, which is yet to resume normal supplies following the Covid-19 lockdown.
However, since FY2016-17 when there was a massive supply disruption from China, many domestic companies have diversified their sourcing away from China. Accordingly, API imports more than halved to USD 408 million in FY2018 from USD 866 million in FY2014.
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Of the leading 19 pharma-formulation manufacturing companies, only nine have their own API manufacturing facilities, and only one manufactures intermediates, indicating very low backward integration, thus making them more vulnerable to supply disruptions.
Even those companies with better backward-integration, their own API and intermediates manufacturing capacities can cater to only a limited portion of their own requirements.
Furthermore, players with own API manufacturing too are likely to be dependent on Chinese imports for supplying the intermediates necessary to manufacture APIs.
Noting that the Covid-driven disruption could be worse than supply shortfall in FY17, when the industry had witnessed a supply disruption from small and mid-sized Chinese suppliers following new environmental regulations there forced many of them to either upgrade their manufacturing facilities disrupting global supplies badly.
If the virus outbreak isn't contained over the next three months, supply disruption is likely to be far greater than that in FY17, resulting in pressures on cash flows for players. But the pressure will be less on API players.
Given the low degree of backward integration, the report believes half companies may face pressures on their credit metrics in the next three-to-nine months.