Indian API Industry To Grow At 7-8% CAGR In Medium To Long Term: Icra

The rating agency Icra expects the Indian active pharmaceutical industry (API) industry, which has an estimated size of Rs 1,000- 1,100 billion in CY2022, to grow at a CAGR of 7-8 per cent over the next three-four years. 

It stated that this will be driven by steady growth in the formulations industry, which in turn will be aided by the increasing geriatric population, growing prevalence of chronic diseases and increasing demand for contract manufacturing with global customers looking to diversify their supply chain dependence from China to alternative destinations. 

Further, the central government’s legislative support and the production-linked incentive (PLI) scheme under its broader Atmanirbhar Bharat mission will boost the API industry’s growth significantly, helping to reduce the dependence on Chinese imports.

Deepak Jotwani, Assistant Vice President and Sector Head, Corporate Ratings, Icra said, “The Indian API industry has faced various headwinds such as rising input costs (raw materials, freight, and energy), forex volatility and supply chain disruptions due to the ongoing geopolitical disruptions, resulting in a sharp contraction of ~550- 600 bps in the operating profit margins (OPM) of ICRA’s sample set1 to ~13.0 per cent in FY2023E over ~18.7 per cent in FY2021."

However, with the easing of supply chain disruptions and freight costs, and the expected stabilisation of raw material prices over the next few quarters, the OPM is likely to improve by 80-100 bps in FY2024, Jotwani said.

"Moreover, the industry is expected to benefit from the Government’s increasing focus on reducing import dependence on China by incentivising local production through the introduction of schemes like the PLI and the bulk drugs parks scheme," explained Jotwani.

He also added that the successful implementation of these schemes will reduce the dependence on China by 25-30 per cent in 4-5 years.”  

Given the dependence on China, the past two years have been challenging for the Indian API manufacturers. Icra highlighted that India imported Rs. 350 billion worth of APIs and bulk drugs in FY2022, accounting for 35 per cent of its total API requirement, of which China accounted for 65-70 per cent share. 

Moreover, dependence on Chinese imports of APIs for certain essential medicines is as high as 80-100 per cent, with almost the entire requirement of certain fermentation-based APIs like Penicillin and Erythromycin being sourced from China. 

The cost advantages of the Chinese API industry and the volatility in the prices of the APIs have kept domestic production of certain APIs unviable for Indian manufacturers, resulting in the continuing dependence on China, the agency added.

Even where the APIs are manufactured locally, the key starting materials (KSMs) are still majorly sourced from China. The Chinese API industry accounts for 40 per cent of the global API requirement and is supported by benefits like higher economies of scale, subsidies and fiscal incentives offered by the government, and lower power, fuel, and borrowing costs, Icra said.