Weak pharma growth in Q2 sparks concerns

Moderation in growth for the Indian pharma market has raised some concerns about companies’ earnings prospects despite expectations of growth picking up. (AFP)
Moderation in growth for the Indian pharma market has raised some concerns about companies’ earnings prospects despite expectations of growth picking up. (AFP)


Weakness in domestic growth is driven by slow growth in the acute segment

Despite a robust performance by homegrown pharma companies in the June quarter, driven by improved growth in the US markets, analysts and investors are closely monitoring the sector’s growth prospects. Since 1 April, the Nifty Pharma index has risen nearly 30%.

Indian pharma market (IPM)’s growth was in mid-single digits in August. It grew 5.8% from a year earlier, as against 6.4% in July, according to analysts’ data.

One contributing factor to this moderation is the high base of August 2022, when IPM growth was at 10.1%. Besides, analysts said this slowdown is also due to sluggish sales in the acute segment.

According to Kotak Institutional Equities analysts, owing to a relatively slower acute season, the Indian pharma market growth remained subdued in mid-single digits for the third consecutive month.

However, moderation in growth for the IPM has raised some concerns about pharma companies’ earnings prospects despite expectations of growth picking up in the second half of the financial year, they added. “While we continue to bake in an 8-15% organic domestic sales growth in FY24 for our coverage, largely driven by pricing and new launches, recent weakness can play spoilsport," Kotak added.

Improved US generics pricing has provided relief, but maintaining strong momentum in domestic sales is crucial for our overall formulations’ coverage, the Kotak analysts said.

Weakness in domestic growth, driven by the slow growth in the acute segment, is all thanks to the high base of last year. Also, steady rainfall during the 2022 monsoon season supported demand of acute segment drugs, while the rainfall this year has remained scanty and erratic, analysts said.

This could be another reason for softer sales growth, said an analyst at a domestic broking firm, seeking anonymity.

However, analysts still hope that growth in the acute segment will pick up in the second half of FY24, because October-December is seasonally strong, owing to the changes in weather conditions, driving sales of respiratory drugs, and some related products.

“IPM data for August shows a continued slowdown on account of lower growth in acute therapies; we expect large acute therapies to grow in 2HFY24 on account of favourable seasonal factors," said analysts at Antique Stock Broking.

“With the chronic segment reporting sustained growth of 12% year-to-date in 2023, we expect the momentum to continue and overall, we expect IPM to report growth in the range of 8-10% for FY24," Antique analysts added.

Prashant Nair, lead analyst, healthcare and pharma, Ambit Capital, expected the chronic categories to outperform acute. In the long term, Nair also expects the market to grow in the range of 8-10%.

While IPM growth remained soft in the past few months, on a moving 12-month average, growth is still impressive. IPM grew 10.1% from a year ago based on MAT in August, led by 4.7% price, 2.6% volume and 2.8% new launch growth, said analysts at JM Financial Institutional Securities. “We await positive monthly volumes, that reported a decline for four consecutive months."

That said, companies like Sun Pharma consistently reported positive volumes. The top performers in the listed universe included Ajanta Pharma Ltd (12%), IPCA Ltd (8%) and Torrent Pharma (8%).

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