Pharma firms may report up to 12% drop in domestic sales in Q1
Mumbai: Pharmaceutical companies are likely to report up to 12% decline in domestic sales in the quarter ended June on account of de-stocking in the trade channel ahead of the implementation of the goods and services tax (GST).
Analysts said the impact of this de-stocking would be more on operating margins and profitability as India business has high margins.
“Our interactions with various stakeholders suggest that up to a third of 1Q (June quarter) India revenues could be affected for most companies. Given the 60%+ gross margins in India, we expect a high impact on profitability as well,” according to a 3 July note of Citi Research.
Companies with higher exposure to domestic market such as Cipla Ltd, Cadila Healthcare Ltd, Ipca Laboratories Ltd and Alkem Laboratories Ltd are expected to bear a bigger brunt, according to analysts.
“Most companies are seen witnessing around 10% decline in revenue from domestic formulations as inventory de-stocking would have impacted primary sales for 20-25 days during the quarter. The impact on EBITDA (earnings before interest, tax, depreciation and amortization) and PAT (profit after tax) would be higher as India is one of the most profitable businesses and operating expenses would have continued,” ICICI Securities said in a report.
As per data from All India Organisation of Chemists and Druggists (AIOCD), distributors had an average 17 days of inventory as on 28 June, much lower than the 40 days at the end of May.
GST came into effect on 1 July. Under the new tax regime, most medicines are taxed at 12%, while life-saving drugs, including insulin, at 5%. According to industry experts, the tax burden has increased by 1-2%.
A major concern for stockists and retailers was the transition to the new tax system, especially regarding inventories held on 30 June, in which they feared some financial loss and hence started cutting down on inventories.
On the pre-GST stock, distributors can avail 100% credit on Cenvat if they possess a central excise invoice issued by the manufacturer, importer, super-stockist or carrying and forwarding (C&F) agent. In case they do not have an excise invoice, then credit can be availed of only on 40% of the central GST, which could lead to losses.
In a bid to incentivise distributors, most pharma companies had agreed to compensate them for any potential loss due to the implementation of GST.
Brokerage firm Credit Suisse said in its pre-earnings note that margins of pharma companies would be hit because of higher incentives given to the trade channel during the quarter.
According to a note by Nomura Global Markets Research, the year-on-year fall in domestic sales of major pharma companies would be in the range of 4-12%.
The key monitoring factor now is the pick-up in primary sales, which will indicate whether demand from the trade channel has increased.
In a report dated 10 July, AIOCD said analysis of the inventory in July first week shows the same inventory levels as of 28 June, which means primary sales continue to remain subdued and stockists have not built up inventory again. However, primary sales could pick up with streamlining of software issues as well as GST registration at stockists.
Citi Research note said most companies appear reluctant to take price hikes to absorb the slightly higher tax incidence and the trade may not be prepared to take a hit on margins either. Hence, it may take a month or two before sourcing gets back to normal