Pharma sector likely to post higher Q2 margins on weak rupee: India Ratings

The domestic pharmaceutical sector is likely to post higher margins in September quarter (Q2FY19) on a year-on-year basis, largely supported by the depreciation of rupee against the US dollar, India Ratings (Ind-Ra) said in its report Wednesday.

About 9 per cent year-on-year depreciation in the rupee in Q2FY19 will help pharmaceutical companies in passing on input cost hikes and manage the pricing pressure, it said.

"Although the pricing pressure in regulated markets, input cost inflation and increased competition continue to be the key concerns, the Indian rupee to continue weakening against the US dollar will support the topline growth of pharmaceutical companies and safeguard them from the margin pressure," the agency said.

It expects that the positive currency impact to continue and the rupee to average Rs 69.79 per US dollar in FY19, a depreciation of 8.3 per cent.

The report said the domestic market offers a relatively high scope to large-sized players to pass on increased input costs than a highly competitive regulated market such as the US.

For most large-sized players, the benefits of a weak rupee and reduced remediation costs, along with traditional cost cutting measures, are likely to help in compensating margin contraction to a large extent in FY19, it added.

The domestic pharmaceutical market has so far briskly grown in FY19, the report said, adding, however, the majority of pharmaceutical companies focused on the domestic market will register muted growth in Q2FY19 on a year-on-year basis.

The rating agency expects large pharmaceutical firms to report topline growth in low double digits for Q2FY19 and EBITDA margin improvement in the range of 100-150 basis points on a year-on-year basis.

India Ratings expects the pharmaceutical sector to post low double-digit topline growth in FY19, supported by improved constant currency revenue growth in the US generic market and continued momentum in the domestic market.

It noted that nearly half of revenue growth in FY19 is likely to be driven by a weaker rupee.