Ind-Ra upgrades pharma sector to stable for FY17

India Ratings and Research (Ind-Ra), a country’s leading rating agency, on Monday revised the outlook on the pharmaceuticals sector to stable for FY17 from positive as the sector’s growth momentum is likely to moderate due to muted export growth. The agency expects export revenue to grow at modest 5 per cent over FY16 and FY17 due to increased regulatory actions and a lower value of drugs going off-patent. Higher depreciation of emerging market currencies is likely to impact export growth to semi-regulated markets. However, Ind-Ra expects the domestic pharmaceutical market to sustain the recently gained momentum and grow at 13 per cent-15 per cent over FY17. Overall sector growth is likely to be 8per cent-10per cent over FY17. The agency believes that a majority of pharma companies will be able to generate positive cash from operations on the back of stable operating profitability and working capital cycle. CFO margins are likely to remain at the current level of 12 per cent-13 per cent in FY17. Free cash flow is also expected to continue to be positive at around 4 per cent on no major increase in annual capex outflows. The strong cash flow generation ability of sector companies is likely to keep the credit metrics stable over FY16 and FY17. Large capex or medium-sized acquisitions would need debt funding. Individual company’s credit metrics may be affected by large debt-funded acquisitions. Ind-Ra continues to maintain a stable rating outlook as the sector’s credit metrics continue to be strong and most of the pharmaceutical companies are rated at ‘IND A’ category or above.