Outlook on Indian Pharmaceutical sector: Fitch

Fitch Ratings has come out with its report on pharma space. 

Stable Outlook: Fitch Ratings outlook on the Indian pharmaceutical sector for 2012 or the financial year to end-March 2013 (FY13) is stable. The agency expects credit profiles to remain stable, should long-term earnings and profitability prospects remain intact with moderate capex. Demand for Generics: The sectors 2012 earnings will be guided by the growing preference for generics as well as opportunities provided by patent expiries in developed markets. According to IMS Health, the shift in global drug spending towards generics is expected to rise to 39% of total pharmaceuticals spending in 2015, up from 20% in 2005 and 27% in 2010.  CRAMS and Domestic Drivers: Despite the impending operational challenges of global pharmaceutical companies, the macroeconomic environment for the Indian contract manufacturing and research services (CRAMS) business would remain favourable. However, among the services offered, contract manufacturing for international pharma companies will dominate the segments earnings in the near to medium term. Strong macroeconomic factors will drive growth in the domestic pharmaceuticals market. Operating Margins Largely Stable: A growing demand for generics, subsequent increase in capacity utilisation and better cost rationalisation will ensure stability to the sectors operating margins. Margins for Indian pharmaceutical companies could also improve with the depreciating rupee; the extent, however, would be governed by the amount of imports and hedging policies adopted. Further, any additional licensing income received from strategic alliances could also have a positive impact on margins. Capex to Remain Moderate: Amid the sectors favourable operating environment, Fitch expects capex to remain moderate. The agency notes that the sector in the past incurred significant investments to capitalise on potential growth opportunities. Therefore further investments would largely be towards expansion or investments in research and development. Moderate Liquidity: Positive growth will demand higher working capital and debt levels would also increase due to the significant depreciation of the rupee and subsequent restatement of foreign-currency-denominated debt in 2012. However, Fitch believes liquidity for mid- to large-size pharmaceutical companies will remain moderate, supported by earnings growth, stable operating margins and limited capex. Further, licensing income from partnerships between Indian and global pharmaceutical companies could further support liquidity. What could change the outlook? Regulatory Concerns: Fitch believes that the negative implications arising from non-compliance to international regulatory standards could hamper the earning potential of Indian pharmaceutical companies and their outlook. For example, a warning letter and/or import alert placed on major revenue-generating manufacturing facilities could impede the affected companys ability to export products to high-margin, developed markets.  Competitive pressures: Fitch believes that strong competition leading to significant reduction in margins could negatively impact individual company outlooks. Forex Concerns: Sustained depreciation of the INR leading to higher debt because of foreign currency borrowing could negatively affect the sectors credit profile. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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