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Reeling under thin margins, small and medium pharmaceutical companies in the Baddi-Barotiwala-Nalagarh belt in Himachal Pradesh are facing an uncertain future, with the excise duty concessions of a majority of the units set to expire between 2014 and 2016.
Insiders said over-capacity, dependence on large players for orders, lack of marketing acumen, and withdrawal of tax benefits are affecting profits, placing a question mark over their future. A few SMEs have already approached potential buyers and are also open to joint ventures.
Local industrialists say the total turnover of the pharma industry, including small, medium and large companies, in the Baddi-Barotiwala-Nalagarh belt is about Rs 25,000 crore. There are some 250 pharma SMEs in the region, accounting for 75-80 per cent of the pharma units located there.
Baddi's fortunes began to change when tax incentives were announced for the hill state in 2003 to attract investments to special-category states. The major attractions for investors included 100 per cent excise duty exemption for 10 years from the date of commencement of commercial production (the budget for 2011-12 stipulated that it would apply to industries starting on or before March 31, 2007); 100 per cent income tax exemption for an initial period of five years and 30 per cent thereafter for a further five years; and a capital investment subsidy of 15 per cent on plant and machinery subject to a ceiling of Rs 30 lakhs, applicable also to existing units.
The president of the Baddi-Barotiwala-Nalagarh Industries Association, Arun Rawat, told Business Standard, "A majority of the pharma SMEs were attracted to this region due to excise duty exemption. The region witnessed a mushrooming of small companies, leading to over-capacity and thin margins. Since a majority of the units commenced operation during the period 2004-06, their excise duty exemption will expire during 2014-16, as it was for 10 years. Companies who are contract-manufacturers and don't have their own products to market, are the ones looking for an exit. Those who have their own marketable products are doing well."
The income tax benefits expired in March-end 2012 and the capital subsidy is set to expire in March-end 2013.
Gopal Munjal, the managing director and CEO of Ind-Swift Ltd, said, "There is over-capacity in this region, making the margins very thin for small players. Withdrawal of incentives would be a double blow. As a result, several small pharma companies are up for grabs. Many of them have recently approached us and want us to acquire them."
The Ind-Swift Group is a leading pharmaceutical group with a presence in 45 countries. It has two listed entities - Ind-Swift Ltd and Ind-Swift Laboratories Ltd - and a wholly-owned subsidiary in the US.
The industry here has been demanding a rail link for over a decade, but that remains a distant dream. The demand for a gas pipeline, which would cut fuel costs for industrial boilers used widely in pharmaceutical units, has also not been met.
