Pharma sector outlook stable: India Ratings
India Ratings has maintained a stable outlook for the Indian pharmaceutical sector for 2013 as large movements in credit profiles are not likely.
The agency expects strong revenue growth from exports, which is likely to offset the negative effect of increased reach of price control in the domestic market.
Strong exports prospects - led by the rise in generic spending - will drive the sector's earnings and profitability.
India Ratings believes that of all countries that Indian pharma exports to, the US will be the sector's main focus area in the short to medium term.
This is mainly driven by the large size of generic opportunities in the US market on account of patent expiries coupled with pro-generic healthcare policies in the medium term.
The strong portfolio of USFDA approved products is likely to help Indian pharma companies succeed in this market.
In the domestic market, the recent decision of the National Pharmaceutical Pricing Policy 2011 to increase number of drugs under price control to 348 (from 74 earlier) will negatively impact the companies which focus on the domestic market, especially MNCs while the impact will be lower on the companies which drive significant revenue from exports.
Revenue visibility and no significant capacity expansions will drive better use of existing capacities leading to a margin expansion.
Asset use (gross fixed assets/ revenue), which had declined to 1.63x in FY11 from about 1.90x in FY08 due to capacity additions, improved to 1.72x in FY12 and is likely to improve further over the next two years as the capacities are increasingly utilised.
Operating margins for certain companies will also benefit from higher profits on account of commercialisation of first-to-file opportunities and complex products.
However, competitive pressures will continue to have a negative impact on margins and will offset part of the margin benefits. The negative impact of pricing pressures will be lower for the large players that are largely backward integrated than for non-integrated smaller to mid-size companies'.
The agency also notes that to maintain growth momentum over a long term, companies are looking at the acquisition route which could result in product portfolio augmentation and or geographic expansion for the acquirer.
Acquisitions, if funded through debt, can negatively impact the credit profiles of acquiring companies; turning out profitable operations from acquired assets could also be a challenge.
The outlook could be revised to negative on account of player-specific or sectorial regulatory actions culminating in import bans or substantial deterioration in credit profile on account of large debt-financed acquisitions.
India Ratings-rated pharmaceutical companies include: Aurobindo Pharma Limited ('IND AA-'/Stable), Jubilant Life Sciences Limited ('IND A+'/Stable) and Strides Arcolab Limited ('IND BBB+'/Stable).