Moneycontrol Pro Panorama | A tale of two export engines

Export driven sectors face innovation and pricing risks.

Dear Reader,

Selling in IT stocks resumed in Tuesday trading as a new report stoked concerns about AI-related disruption. Several Indian brokers have also pared their valuation targets for IT stocks.

The actual impact of new technologies will be known only over a period of time. Even so, investors are hedging their bets.

The Nifty IT index is now down by about 22 percent in the last one year. Comparatively, the NSE Pharma index, which also counts US as its biggest export market, has gained about 10 percent. IT and pharma are distinct industries. Yet, they have similarities: Both are export dependent industries and face risks from innovation, competition and price erosion.

As it turns out, pharma is currently better placed than the IT services industry from an earnings perspective despite the waning benefit from a limited-opportunity large oncology drug, generic Revlimid. The domestic market, a large business segment of Indian pharma, is growing steadily. Recent quarterly results even indicate the benefit of rupee depreciation for pharma.

The loss of generic Revlimid exclusivity is feared to weigh on US sales of some pharma companies in the near term. However, companies and analysts are not worried about there being a prolonged period of subdued growth rates, like the one currently feared for IT services industry.

Readers may note that the business of pharma companies steadily gets commoditised over a period of time. The trick is in climbing the value chain by constantly investing in new drugs and treatments. Pharma companies have got this right in recent years.

They have tactically increased exposure to high value and difficult-to-manufacture complex generic drugs over the last several years. These products face less competition compared to plain vanilla generics and offer better prices. Sun Pharma has even built a large specialty drug business.

As per Nomura, new drug filings with the US Food & Drug Administration (US FDA) dropped to their lowest levels in two decades in FY25 ending September (barring exceptions in FY14-15), indicating the focused approach of Indian pharma companies.

“The industry is selective with product development. Almost ~17 percent of the ANDA filings are classified as complex product filings,” Nomura said in a note in January. ANDA is Abbreviated New Drug Application filed with the US FDA.

The net result is a notable improvement in pharma exports in the past two fiscal years. According to India Ratings and Research, product specific opportunities helped Indian pharma companies grow their US revenues faster between FY23-25 compared to FY18-22.

The companies reported steady financial performance in the December quarter. Latest analyst estimates indicate a decent growth in earnings of finished dosage drug manufacturers in FY27 and FY28. India Ratings is projecting a revenue growth of around 10 percent for pharma sector in FY27.

It is another matter that Indian drug companies are way behind in inventing new drugs. But they are handling business commoditisation reasonably well. IT services can learn a lesson or two from them.

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R Sree Ram Moneycontrol Pro