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Indian API industry to grow at 7-8 per cent CAGR in the medium to long term: ICRA

Atmanirbhar Bharat mission, PLI scheme will boost the API industry's growth, the segment's operating profit margins are likely to improve by 80-100 bps in FY2024 from ~13.0 per cent in FY2023

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ICRA expects the Indian active pharma industry (API) industry, which has an estimated size of Rs. 1,000-1,100 billion in CY2022, to grow at a CAGR of ~7-8 per cent over the next three-four years. This will be driven by steady growth in the formulations industry, which in turn will be aided by the increasing geriatric population, growing prevalence of chronic diseases, and increasing demand for contract manufacturing with global customers looking to diversify their supply chain dependence from China to alternative destinations. Further, the Central Government’s legislative support and the production linked incentive (PLI) scheme under its broader Atmanirbhar Bharat mission will boost the API industry’s growth significantly, helping to reduce the dependence on Chinese imports.

Deepak Jotwani, Assistant Vice President & Sector Head – Corporate Ratings, ICRA said, “The Indian API industry has faced various headwinds such as rising input costs (raw materials, freight, and energy), forex volatility and supply chain disruptions due to the ongoing geopolitical disruptions, resulting in a sharp contraction of ~550-600 bps in the operating profit margins (OPM) of ICRA’s sample set to ~13.0 per cent in FY2023E over ~18.7 per cent in FY2021. However, with the easing of supply chain disruptions and freight costs, and the expected stabilisation of raw material prices over the next few quarters, the OPM is likely to improve by 80-100 bps in FY2024. Moreover, the industry is expected to benefit from the Government’s increasing focus on reducing import dependence on China by incentivising local production through the introduction of schemes like the PLI and the bulk drugs parks scheme. The successful implementation of these schemes will reduce the dependence on China by ~25-30 per cent in 4-5 years.”

Given the dependence on China, the past two years have been challenging for the Indian API manufacturers. ICRA highlighted that India imported ~Rs. 350 billion worth of APIs and bulk drugs in FY2022, accounting for ~35 per cent of its total API requirement, of which China accounted for ~65-70 per cent share. Moreover, dependence on Chinese imports of APIs for certain essential medicines is as high as 80-100 per cent, with almost the entire requirement of certain fermentation-based APIs like Penicillin and Erythromycin being sourced from China. The cost advantages of the Chinese API industry and the volatility in the prices of the APIs have kept domestic production of certain APIs unviable for Indian manufacturers, resulting in the continuing dependence on China. Even where the APIs are manufactured locally, the key starting materials (KSMs) are still majorly sourced from China. The Chinese API industry accounts for ~40 per cent of the global API requirement and is supported by benefits like higher economies of scale, subsidies and fiscal incentives offered by the government, and lower power, fuel, and borrowing costs.

ICRA’s sample set witnessed a healthy annual revenue growth of 15-18 per cent over FY2021 and FY2022, with the trend expected to sustain over FY2023 and FY2024. The API industry is characterised by high working capital intensity led by the need to maintain critical raw material inventory levels for uninterrupted supply and relatively higher receivable days. Inventory levels of API players further increased in FY2022 and FY2023 as companies tried to ensure production continuity while various geo-political disruptions continued to impact supply chains. However, the same is expected to normalise to some extent over the near term. With an increasing focus on domestic manufacturing of APIs, the industry is expected to continue its capital expenditure investments, partly supported by the PLI scheme. Despite these, the debt metrics (Total Debt/OPBDITA of 1.4-1.6 times) and return indicators (RoCE of 17-18 per cent) of the sample set are expected to remain healthy over FY2023 and FY2024, supported by steady internal accrual generation and comfortable capital structure.

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