Pharma SMEs will overcome short-term disruptions: CRISIL SME Tracker

Pharmaceuticals, being an essential commodity, is better-placed than other sectors to weather the storm.
The Indian pharmaceuticals industry is very fragmented, with small and medium enterprises (SMEs) accounting for 35-40 per cent of production in value terms. The industry is currently facing uncertainty in the wake of the Covid-19 pandemic. However, going ahead, SMEs in this sector will overcome the short-term disruptions, as demand in both export and domestic markets remains robust.

Short-term disruptions include high input costs and various operational challenges. Although China has gradually resumed production of raw materials following disruptions in February and March this year, the cost of inputs remains high. While Indian companies have started receiving supplies, their average cost has risen 20-30 per cent. In addition to price hikes, timely availability of raw materials also remains a concern in the wake of India-China trade tensions.

SMEs also face other operational challenges, such as lower capacity utilisation, high cost of freight and working capital constraints, among other things. Fixed expenses and an increase in receivable days are also pushing working capital needs upwards. Consequently, the margins of SME players are likely to decline in the current fiscal year.

Pharmaceuticals, being an essential commodity, is better-placed than other sectors to weather the storm. SMEs in the export segment are likely to fare better than those in the domestic market. Rupee depreciation and stable demand should provide support to export-focussed players.

However, the domestic market faced negative growth in April and March owing to demand disruptions caused by the lockdown. Hence, domestic market growth is likely to be relatively slower in the current financial year.

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