Riding on the depreciation of the Indian currency vis-a-vis the US dollar, analysts expect the pharmaceutical sector to report higher margins in the second quarter of the fiscal. In a recent report India Ratings and Research highlighted that while pricing pressure in regulated markets, input cost inflation and increased competition continue to be the key concerns for the sector for the remaining FY19, the rupee will continue to weaken against the dollar and thus support the top line growth of pharma firms. This would also safeguard them from margin pressure, the market research firm noted. The report also noted that majority of drug firms focussed on the domestic market would register muted growth in Q2FY19 on a year-on-year basis. “The growth in Q2FY18 was because of channel restocking after the implementation of goods and services tax. Large pharmaceutical companies are likely to report topline growth in low double digits for 2QFY19 and EBITDA margin improvement in the range of 100bp-150bp on a year-on-year basis,” the report noted. Ebitda stands for earnings before interest, depreciation, tax and amortisation, and is an indicator of a company’s operating profitability. Nearly half of revenue growth in FY19 is likely to be driven by a weaker Indian rupee.Companies like Sun Pharma, Cadila Healthcare, Lupin, Aurobindo are likely to see improvements in Ebitda margins thanks to the rupee depreciation,” said Amey Chalke, analyst with HDFC Securities. He added that almost 80 per cent of the exports by the major pharma firms are in dollar denominations. Indian companies continued to receive increased abbreviated new drug approvals. About 150 abbreviated new drug approvals of the total 386 were approved in 1HFY19, enabling Indian companies to expand their product portfolios. However, the increased number of abbreviated new drug approvals indicates a rise in competition. The sudden increase in the prices of imported active pharmaceutical ingredients (APIs) over Q4FY18-Q1FY19 led to a 100 bp-350 bp fall in the gross profit margins of some large players. “About 9 per cent yoy depreciation in the Indian rupee against the US dollar in 2QFY19 will help pharmaceutical companies in passing on input cost hikes and manage the pricing pressure. Despite continued input price inflation, the net impact of the weakening Indian rupee is likely to help the sector report better margins,” India Ratings said. However, going forward, the API supply situation is likely to improve in the second half of FY19, as drug manufacturing facilities gradually recommence operations with enhanced environmental compliance. API prices are, however, likely to settle at a higher-than-the-previous-average level.
Source : www.business-standard.com
Published on: November 6, 2018