India Ratings and Research (Ind-Ra) has maintained a stable outlook for the Indian pharmaceutical sector for FY22.

Ind-Ra expects the Indian pharmaceuticals market (IPM) to grow 8%-10% yoy in FY22, while the US generic market is expected to revert to mid-single-digit price deflation as the benefits of forward buying and the higher sales of COVID-19-related products taper off. The Indian active pharmaceuticals ingredient (API) suppliers witnessed strong revenue growth (19% yoy) during 9MFY21, due to channel stocking by formulation players, higher pricing and clients diversifying away from China-based suppliers.  While the agency expects some benefits to continue, we expect significantly lower revenue growth in FY22 due to higher base impact and the normalisation of supply chain leading to lower yoy sales. Revenue growth normalisation across key markets, along with optimised operating costs, will lead to healthy EBITDA margin performance and higher cash flow from operations (CFO) in FY22. Higher capex, in lieu of the production-linked incentives (PLI) scheme, will restrict the quantum of free cash flow generation during the year.

Ind-Ra has also maintained a Stable Outlook for its rated pharma issuers for FY22, expecting limited rating movements in the sector. The agency has downgraded one company in its pharma portfolio since April 2020. The agency’s rating actions for FY22 are likely to be driven by other company-specific factors, such as adverse regulatory actions by the US Food and Drug Administration (USFDA), delays in product approvals, product addition in pricing cap in India, or significant currency movements leading to an impact on the profitability of pharma players. Ind-Ra has observed fewer facility inspections from the USFDA and other regulators in lieu of the pandemic, which may not sustain over the medium term. Ind-Ra continues to monitor its rated portfolio and any material deviation in credit metrics from its expectations could result in a rating downgrade.

Most large pharma companies rated by Ind-Ra belong to the high investment-grade categories. For a majority of them, the business risk profiles are commensurate with their rating levels and their absolute leverage levels are within the rating thresholds. Large players are adequately capitalised to make bigger investments to adjust for the ongoing fundamental shift in market opportunities.

Ind-Ra expects the emerging pricing stability in the US generic market and robust volume growth in the domestic pharmaceutical market to continue well into FY22 and support high single-digit to low-teen revenue growth for the sector. After a long time, cost cutting has emerged as a clear priority for several large issuers; this, along with operating leverage benefits, can result in positive free cash flows. However, the level of free cash flow generated could be constrained by high working capital requirements.

Ind-Ra does not expect the sector’s liquidity to face a major risk, despite the maturities in FY22 and FY23. With repayments on the debt availed earlier for acquisitions kicking-in, the sector’s refinancing requirements are likely to increase. However, large pharma companies generally have large cash balances, which typically account for 16%-18% of their revenues. Furthermore, most companies have sufficient headroom under debt covenants and diversified funding sources. The interest coverage of large pharma players is likely to increase with scale and margin expansion. Also, the new Reserve Bank of India’s framework, which that stipulates that large companies rated ‘AA’ and above need to raise 25% of their incremental debt from capital markets, will see have only a minimal impact on the capital structure, given that most funding is export-oriented.

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Analyst Names

  • Krishnanath Munde

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 44 43401768

    Nishith Sanghvi

    Associate Director

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121