Indian pharma sector set for 8-10% growth this fiscal: CRISIL Ratings

The sector is expected to benefit from steady cash flows and low financial leverage, which will help maintain stable credit profiles, even as pharma cos pursue acquisitions in niche therapeutic areas

The Indian pharmaceutical sector is expected to see revenue growth of 8-10 per cent this financial year, driven by strong exports to regulated markets such as the US and Europe, a recovery in semi-regulated markets including Africa and Asia, and consistent domestic demand, according to a report by CRISIL Ratings.

This growth follows a successful previous year with roughly 10 per cent growth. A key factor supporting this positive outlook is the easing pricing pressure in the US generics market and improved operating leverage, leading to an expected rise in operating margins by 70-80 basis points to approximately 22.5 per cent.

The sector is also expected to benefit from steady cash flows and low financial leverage, which will help maintain stable credit profiles, even as pharmaceutical companies pursue acquisitions in niche therapeutic areas.

The CRISIL study, which covered 190 drugmakers responsible for around half of the Rs 4.1 lakh crore market last year, reveals that revenue is split almost equally between domestic sales and exports. Domestic formulations revenue is driven by both chronic and acute therapeutic segments, while exports primarily come from formulations (80 per cent) and bulk drugs (20 per cent).

Formulation exports are expected to grow 12-14 per cent in rupee terms, with regulated markets like the US and Europe witnessing growth of 13-15 per cent, due to ongoing drug shortages, new product launches, and a shift towards speciality products and niche molecules. Exports to semi-regulated markets are forecasted to increase by 8-10 per cent, aided by improving foreign exchange reserves and stabilising currencies in African and Latin American countries.

The report also emphasises the financial stability of the sector. Continued strong cash generation and low financial leverage will support "stable" credit profiles for pharmaceutical companies, even amidst ongoing acquisitions in targeted therapeutic areas.

On the domestic front, revenue is projected to grow by 7-9 per cent, largely driven by price increases, particularly in non-NLEM (National List of Essential Medicines) products. However, growth for the NLEM portfolio will remain subdued due to minimal changes in the Wholesale Price Index (WPI) last financial year. The chronic segment, supported by rising lifestyle-related diseases and heightened health awareness post-pandemic, is expected to be a key contributor to domestic revenue growth.

According to Aditya Jhaver, director at CRISIL Ratings, companies are focusing on acquisitions to expand their presence in the active pharmaceutical ingredients (API) and formulations sectors, either to diversify their portfolios or consolidate market share in targeted therapeutic areas. Although such acquisitions may result in short-term debt increases, the overall business risk profile of the sector is expected to improve due to immediate contributions from these acquisitions.

Looking ahead, CRISIL warns that large-scale, debt-funded acquisitions, regulatory challenges, potential price caps on raw materials, and litigation costs from US antitrust suits remain key monitorables for the sector.