TEXT: Fitch: Stable Outlook for Indian Pharmaceutical Sector in 2012

(The following was released by the rating agency)

Link to Fitch Ratings' Report: 2012 Outlook: Indian Pharmaceutical

here

MUMBAI/SINGAPORE, January 29 (Fitch) Fitch Ratings says that the 2012 outlook for the Indian pharmaceutical industry is stable. The agency expects credit profiles to remain stable given that long-term earnings and profitability prospects remain intact with moderate capex.

Fitch believes that during 2012, earnings prospects for Indian pharmaceutical companies 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 expects that amid the growing demand for generics, capacity utilisation for the sector would increase and operating margins would benefit from better cost rationalisation. The agency notes 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.

Fitch believes that in light of the sector's positive prospects, working capital could remain high. 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 capex. Licensing income from strategic alliances between Indian and global pharmaceutical companies could further support liquidity.

Fitch notes significant negative implications arising from non-compliance with international regulatory standards ,competitive pressures resulting in significant reduction in margins and sustained depreciation of the rupee leading due to higher debt on account of foreign currency borrowing could hamper the sector's credit profile.

The full report '2012 Outlook: Indian Pharmaceutical Sector' is available at www.fitchratings.com or by clicking on the link above.