Five major pharma companies will save Rs 49 crore from the cut in corporate tax and removal of surcharge. While Glaxo is likely to save Rs 7.92 crore, Ranbaxy will save Rs 6.14 crore, Cipla will benefit by Rs 4.18 crore, Pfizer by Rs 3.04 crore and E Merck by Rs 27.72 crore..
Ranbaxy, Dr Reddy's and MNC major, Hoechst Marion Roussel are also expected to benefit from the 125 per cent weighted deduction allowed for investments on fixed assets for R&D. The pharma industry was divided in its opinion on the provisions announced for the industry by finance minister P Chidambaram in the budget.
H R Khusrokhan, Glaxo India managing director, said the tax outgo will decrease from 43 per cent to 35 per cent, resulting in savings between Rs 7 and 8 crore. "The budget will boost investor confidence. The change in MAT is an innovative way of converting it into an advance tax. But, we are also disappointed in that no impetus has been given to R&D," he added. For domestic companies, the positive measure is exemption of export profits from MAT. But Alroy Lobo of Kotak Securities points out that this will be countered, to some extent, by the 10 per cent tax levied on distributed profits. The major gainers are likely to be Cheminor Drugs, Ranbaxy, Kopran, Dr Reddy's Labs, Lupin Labs and Cipla.
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Nishid Shah of Inquire Equity Research said that Cipla would be the principal beneficiary. "The budget is a well balanced one. Since the pharma industry is heavily export oriented, it is a step in the right direction," said D B Gupta, chairman of Lupin Labs.
Surendra Somani, Kopran managing director said, "The budget is good for the industry as a whole. Fifty per cent of our sales turnover comes from exports and we will save around 7 per cent on tax."
The budget has rationalised the excise tariff for bulk drugs. It has increased duty on bulk drugs from 10 to 18 per cent and cut raw material duty from 20 to 18 per cent. A pharma source said the move addresses a long standing demand of the industry, as the anomaly in excise duties on bulk drugs and raw materials led to unutilised Modvat for the bulk drug producers.
However, small and medium sized players that were either not exporting or were exporting only generic formulations are crestfallen.
Dinesh Patel, president of the Indian Drug Manufacturers Association (IDMA) was critical of the budget, saying it ignored many of the industry's major demands. "The budget is a total blackout for the pharma industry and will have bad implications in the long term. The customs duty reduction without introduction of VAT (value added tax) will discourage investment in bulk drugs. Although, the excise duty has been rationalised, the levy of 18 per cent duty on bulk drugs will make generic formulations costlier." IDMA is the apex organisation of the domestic drug manufacturers.
Although large players will benefit, the reduction in customs duty on organic and inorganic chemicals will have an adverse impact on small scale manufacturers. While SSIs have been given certain sops, they will be denied Modvat benefits while having to pay a 3 per cent excise duty on clearances between Rs 30 and 50 lakh and 5 per cent on clearances between Rs 50 and 100 lakh.
Some observers feel this will be good for the industry in the long term as there are too many manufacturers now. There are 23,790 pharma units in the country, many of them small scale.
The customs duty cut has been criticised by the `Association of Domestic Industry Affected by Dumping'. They feel the move will only increase dumping by Chinese companies especially in strong pharma products. Indian companies like IPCA and Tata Pharma, which were adversely affected by the Chinese dumping of `chloroquine' will be hit further if anti-dumping duties are not revised expeditiously.
Pharma companies like Kopran, Nicholas Piramal (after the merger of Boehringer Mannheim), Bayer and Zydus group make and import medical equipment. They stand to gain from the decrease in import duty on such equipment from 30 to 20 per cent.
The move allowing export earners to invest up to $15 million in overseas ventures without RBI approval will give an impetus to large Indian corporates that have global designs and will also boost exports, says Tarun Jaitly, analyst at James Capel. Large Indian corporates like Ranbaxy, Lupin Labs, Cipla and Kopran will find their task of setting up marketing and liaisoning offices abroad facilitated.
Vijay Thacker, sector specialist of Ind Sec Share & Stockbroking, said, "The changes will help the industry meet international standards. The pharma industry will see further re-structuring and consolidation."
Small drug companies with good operating margins will be targets for take-overs by larger players while ailing units will die a slow death. Unless, the government introduces research boosting measures, Indian companies which do not have technical collaborations will find themselves unable to compete in the post IPR scenario.