Ratings agency Fitch has assigned stable outlook for the Indian pharmaceutical sector in 2012 because of good credit profile of the segment.
The report, however, warned of the negative implications which may arise from non-compliance with international regulatory standards, competitive pressures resulting in significant reduction in margins and sustained depreciation of the rupee leading to higher debt on account of foreign currency borrowing.
It said the earning prospects for pharma companies this year will continue to be guided by the growing preference for generics as well as opportunities provided by patent expiries in developed markets.
"Furthermore, other segments of the sector, namely contract research and manufacturing services, and the domestic market are also expected to continue to grow due to the favourable macro environment," Fitch said. The Indian pharmaceutical sector is estimated to be around USD 20 billion.
Fitch said that amid the growing demand for generics, capacity utilisation for the sector would increase and operating margins would benefit from better cost rationalisation.
Besides, it noted that margin improvement for the sector could also accrue due to depreciation of the rupee.
"However, the extent of this would be governed by the amount of imports and hedging policies adopted. Any additional licensing income received from strategic alliances could also have a positive impact on margins," it added.
The rupee has depreciated by around 15 per cent so for during the current fiscal on account of volatile global economic conditions and offtake by FIIs. The Indian currency has, however, now started showing signs of recovery.
According to the report, working capital of Indian pharma companies could remain high due to the sector's positive prospects.
It, however, added that debt levels would also increase due to the significant depreciation of the rupee and subsequent restatement of foreign currency denominated debt.
"However, liquidity for mid- to large-size pharmaceutical companies is expected to remain comfortable, supported by earnings growth, stable operating margins and limited capital expenditure."
"Licensing income from strategic alliances between Indian and global pharmaceutical companies could further support liquidity," Fitch said.