The Covid-19 outbreak is unlikely to impact the credit profiles of India-Ratings rated pharmaceutical companies in the near term, despite the pharma industry’s heavy reliance on Chinese active pharmaceutical ingredients (API) and intermediates, according to India Ratings and Research.
China is the world’s largest exporter of APIs and intermediates. Approximately 70 per cent of India’s total API requirement is met by imports from China.
Nonetheless, in case the supply disruption continues over the next three-to-nine months, the pressures on credit buffers could intensify and rating transitions would be imminent, especially in case of the entities rated ‘IND A’ and below. Furthermore, if the disruption spills beyond the next nine-to-12 months, some of the higher rated corporates could face downward pressure.
India-Rating’s portfolio consists of 19 pharma-formulation manufacturing issuers that are rated ‘IND A-’ and above. Among these entities, only nine have their own API manufacturing facilities, and only one manufactures intermediates.
Given the low degree of backward integration, the agency believes that half of the companies in the ‘IND A’ category could face pressures on their credit metrics in the next three-to-nine months.
On the other hand, majority of the companies rated ‘IND AA’ and ‘IND AAA’ have the liquidity buffer necessary to absorb the effect of lower capacity utilisation and pressures on margins, if any – even up to the next 12 months, the agency stated.
The immediate pressure is likely to be low, given that most pharma players tend to increase their inventory levels in December in preparation for the Chinese New Year leave in January or February. The agency understands that these players, thus, have adequate inventory to carry on their production without any major disruption at least for the next one month.
The agency said, “API manufacturers are likely to be affected in the near term given that they remain dependent on imports from China to meet the demand for intermediates, which are necessary to manufacture APIs. Nonetheless, the impact of lower asset turnover could be offset by the rise in prices of APIs, in India and globally, on account of a shortage in Chinese supplies. This could mitigate the credit impact on API players, at least in the near term.”
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