Indian generic formulation-makers level of capex declining: Candle Partners

Candle Partners study shows that from the peak of 30% of gross block in FY16, the capex is down to 9-10% of gross block

Indian generic formulation pharma companies’ capex has been steadily coming down, shows data from investment banking and consulting firm Candle Partners.

Speaking to Business Standard, Candle Partners founder Navroz Madhudawala said that the level of capex over the last three to four years has reduced for formulation generic companies. “It peaked for large caps at around 30 per cent of Gross Block in FY2016, which was the peak of regulated market investments by Indian pharma. Since then it's been a consistent decline and is now stabilised at 9-10 per cent of Gross Block for the last 2 years (FY2021, FY2022).” 

On the contrary, the capex cycle for active pharmaceutical ingredients (APIs) continues to be robust with the industry consistently spending 18-19 per cent of their Gross Block on capex, Madhudawala added.

So, what is the reason behind this dip in capex by formulation players? Madhudawala feels that this is directly linked to underperformance in regulated markets. “Most of the larger companies in India are sitting on idle capacities as far as solid dosages for regulated markets are concerned. India invested heavily in regulated market capacities in the FY15-FY17 phase and probably the effect of that will take some time to normalize,”

The MD of a leading pharmaceutical firm said, “In absolute numbers, the capex has not come down. But, yes the priority areas keep changing. Once we have created capacity for the US markets, we cannot just keep adding capacity yearly. Then, we focus on investing in processes.”

Candle Partners says that over the last five years, the sector has reported revenue growth of 7 pe rcent. Flat or negative growth for the US business of several companies is the single biggest contributor to these low growth rates. For most companies, India and the Rest of the World (RoW) business has been growing at 10-12 per cent, which has helped mitigate the muted US performance.

In contrast, API makers have been growing -- 5-year revenue CAGR of 15 per cent, the EBITDA margins are around 24-28 per cent.

The US sales as a percentage of total formulations peaked at 42 per cent in FY17 and declined consistently ever since. In the meanwhile, Indian revenues are up from 27 per cent to 32 per cent.

Indian pharma majors like Torrent, Cipla, Dr Reddy’s Laboratories etc are thus focusing on their India businesses.

“For most of the companies these two business plans have been growing at approximately 10-12 per cent and which has helped in mitigating the USA performance,” Candle Partners noted.

R&D expenditures have seen a sharp cut-back – from a historical 9 per cent in FY16 and FY17 to the current 5-6 per cent levels. “While this is good for near-term Return on Capital Employed (ROCEs), long-term implications are questionable,” the consultant said.