Online pharmacy operating losses to reduce in FY26, predicts CRISIL

India’s online pharmacy sector is on track to reduce operating losses to below 10 per cent in the next financial year, a sharp improvement from over 30 per cent in FY23, rating agency CRISIL said.

 

An operating loss occurs when a company's operating expenses exceed its gross profits. This typically happens during a company’s initial growth phase.

 

For e-pharmacies, this positive trajectory is being driven by a strategic pivot towards high-margin product segments, such as wellness items and medical equipment. These segments are expected to comprise 40 per cent of sales next financial year, up from 30 per cent currently and just 15 per cent in FY23.

 

According to CRISIL, online pharmacies, which account for 3-5 per cent of India’s retail pharmacy market, have immense growth potential given the under-penetration compared to developed nations, where online pharmacies contribute 22-25 per cent. The overall retail pharmacy market in India is valued at around Rs 2.4 lakh crore, dominated by the unorganised sector with an 85 per cent share.

 

Revenue growth of 9-11 per cent is anticipated for this and the next financial year, buoyed by increasing digital adoption, greater internet access, and expanded reach in Tier-I and Tier-II cities. This follows the nearly twofold revenue surge observed during the COVID-19 pandemic between FY20 and FY23.

 

However, sustained growth hinges on timely equity funding. CRISIL Ratings estimates that the sector will require an additional Rs 2,300 crore in equity funding over the next two financial years. Since FY20, over Rs 9,200 crore has already been infused into the sector.

 

“Ongoing losses underscore the need for strong financial backing from promoters, private equity investors, and venture capitalists,” said Naren Kartic K, associate director, CRISIL Ratings. “Bank loans are likely to remain limited to working capital financing due to evolving regulations and high acquisition costs impacting profitability.”

 

Despite the promising outlook for operating losses, the report acknowledges that cash losses will likely continue for the foreseeable future. This persistence is attributed to the high operational costs inherent in the online pharmacy business, along with intense market competition.

 

Nevertheless, the report suggests that banks may still be open to providing working capital finance to well-established online pharmacies, particularly those with strong backing from their promoters. While cautious about long-term loans, banks are providing working capital support to e-pharmacies with robust promoter backing.

 

According to CRISIL Ratings’ analysis, e-pharmacies have been steadily moving away from aggressive discounting practices, which previously led to high operating costs. By cutting key expenses—including discounting, delivery, distribution, and employee costs—from 65 per cent of revenue in FY23 to an expected 35 per cent next financial year, players aim to accelerate their path to profitability.

 

“E-pharmacies are eyeing sustainable growth by diversifying into high-margin segments like wellness products and medical equipment. These segments’ contribution to sales is set to nearly triple within two years, helping narrow losses and foster profitability,” said Poonam Upadhyay, director, CRISIL Ratings.

 

Despite these efforts, cash losses will persist over the next two financial years due to high operational costs and fierce competition. The sector’s initial investment in technology, supply chain infrastructure, and customer acquisition has resulted in significant financial strain. Marketing expenses and discounts, vital for attracting customers in a fragmented market, have further inflated costs.

 

The sector’s growth trajectory is not without risks. Regulatory uncertainties, including potential changes in government guidelines, could impact operations. Draft rules published by the Ministry of Health and Family Welfare in August 2018 to amend the Drugs and Cosmetics Rules, 1945, aim to regulate the online sale of medicines, adding another layer of complexity.