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After achieving about 10 per cent growth last year, the Indian pharmaceuticals sector is again set to log a revenue growth of 8-10 per cent this fiscal, according to a report on Wednesday. 

The report by rating agency Crisil suggested that the growth is supported by healthy exports to regulated markets, recovery in exports to semi-regulated markets, and steady domestic demand.

The resultant improvement in operating leverage along with easing pricing pressure in the US generics market will improve operating margins by 70-80 basis points (bps) to about 22.5 per cent this fiscal. This will be on the back of an increase in margins by 100bps last fiscal.

Continued strong annual cash generation and low financial leverage, will support ‘stable’ credit profiles of players even as companies continue to pursue acquisitions in targeted therapeutic areas.

According to a CRISIL study of 190 drug makers, the sector accounts for about half of the Rs 4.1 lakh crore market last fiscal.

The pharmaceutical sector revenue pie is split almost equally between domestic sales and exports. Domestic formulation revenue comes equally from chronic and acute therapeutic segments. 

As for exports, formulations, and bulk drugs contribute about 80 per cent and about 20 per cent, respectively. For formulations, 58 per cent of exports are for the regulated markets and 42 per cent of exports for the semi-regulated markets.

“Formulation exports are expected to grow 12-14 per cent in rupee terms this fiscal. The regulated markets of the US and Europe will witness a growth of 13-15 per cent, driven by continued drug shortages, easing pricing pressures in the US generics market, and the volume uptick expected from new product launches as well as players shifting focus towards niche molecules and specialty products,” said Aniket Dani, Director, Crisil Market Intelligence and Analytics. 

“On the other hand, exports to semi-regulated markets will grow 8-10 per cent this fiscal, led by improving forex reserves, strengthening of local currencies against the dollar, and easing economic crises in select African and Latin American countries,” Dani added.

Further, the report showed that the domestic revenue is likely to see growth of 7-9 per cent this fiscal, primarily price-driven, with volume growth to be backed by new product launches. 

Price growth will be led by the non-NLEM (National List of Essential Medicines) portfolio, as price growth for the NLEM portfolio shall remain muted, due to minimal change in the Wholesale Price Index (WPI) last fiscal. 

CRISIL expects the chronic segment to be the key revenue contributor amid increasing lifestyle-related diseases and continued emphasis on health awareness since the pandemic.

Steady growth in revenues, healthy operating profits, and a stable working capital cycle at about 50 days will keep cash flows strong. The financial risk profile of the CRISIL-rated players remains comfortable, with debt to earnings before interest, tax, depreciation, and amortisation ratio at 0.9 times and interest coverage at over 12 times in fiscal 2025.

“With strong cash flows and healthy balance sheets, players are increasingly focusing on inorganic growth opportunities in the API and the formulation space, to either diversify the product portfolios by acquiring the brands/businesses and/or to consolidate market share in the targeted therapeutic areas,” said Aditya Jhaver, Director, Crisil Ratings. 

“While these acquisitions involve sizeable debt funding and a temporary moderation in the financial risk profile, overall credit profile continues to drive comfort from the improvement in the business risk profile, with immediate contribution accruing from acquired entities,” Jhaver added.