API import costs – Largely flat QoQ, but down 23% from Q2CY22 peaks: IIFL Capital Services

17 Jul 2023 , 11:29 AM

Analysts of IIFL Capital Services analysis of import pricing for 16 key APIs/KSMs imported into India shows that API import costs have declined marginally by 1.2% QoQ in Q2CY23. However, from the peaks seen in Q2CY22, overall API import costs have declined by 23%, with prices of several key APIs (PAP, DCDA, Azithromycin, 7ACA, Artemisinin, CDA) having corrected 30% from peaks. Import prices for certain antibiotic APIs (Pen-G, Clavulanate and Erythromycin) continue tremain sticky at elevated levels and have corrected only 0-9% from peak levels. Moderating API costs and hence anticipated GM improvement lend comfort tour assumption of ~200bps Ebitda margin expansion for the Pharma sector over FY23- 25. 

While most Pharma companies will benefit from moderation in API/RM costs, the margin normalisation for Alkem has been delayed owing tits high dependence on Pen-G for which prices are still sustaining at USD33/kg vs pre-Covid levels of USD15/kg. Sun, Mankind, JB and Alkem are our top-picks in the Pharma sector, but we find better risk-reward in Sun and Alkem at current stock prices. 

IIFL’s ‘API/KSM Import Pricing Index’ shows that API import costs have moderated 1.2% QoQ in Q2CY23 and 23% from Q2CY22 peaks: In analysts of IIFL Capital Services Mar’22 and Oct’22 reports, analysts of IIFL Capital Services had highlighted that they have created an API/KSM Import Pricing Index, based on imported prices for 16 key APIs/KSMs across Antibiotics, Anti-infectives, Neurology, Cardiac, Diabetes and VMN segments. India’s import dependence on China for these 16 key APIs/KSMs varies between 60-100%. They have calculated the weighted import price for this ‘API/KSM Import Pricing Index’ from Q1CY19-Q2CY23.

Analysts of IIFL Capital Services analysis shows that API import costs (weighted average) for these 16 key APIs/KSMs have marginally declined by 1.2% QoQ in Q2CY23, after having corrected 6/13/5% QoQ in Q1CY23/Q4CY22/ Q3CY22 respectively. Q2CY23 is the fourth consecutive quarter showing sequential decline in API import prices vs a consistent ~3- 8% QoQ increase in API import prices over the prior six quarters (Q1CY21-Q2CY22).

From the peaks seen in Q2CY22, overall API import prices have declined 23%, while prices of several key APIs have corrected 30% from the peaks. Analysts of IIFL Capital Services note that API import costs have now retraced tthe levels last seen in H1CY20 and are only ~5-10% above the preCovid levels for most of the APIs except the antibiotic APIs. Prices of key APIs (PAP, DCDA, Azithromycin, 7ACA, Artemisinin, CDA) have corrected ~30% from peaks:

• PAP/Para-Amino-Phenol – KSM for Paracetamol; import price decline of 14% QoQ in Q2CY23 and 40% from peaks; Granules is the key importing player.
• DCDA – Intermediate for diabetes product Metformin; import price marginally increased 4% QoQ in Q2 but has declined 35% from peaks; Granules, Aarti & Ipca are the key importing players.
• Azithromycin – Antibiotic; import price increase of 6% QoQ in Q2, but decline of 14% from peaks; Alembic, Cipla, Jubilant & Alkem are the key importing players.
• 7ACA – Antibiotic; import price increase of 6% QoQ in Q2, but decline of 20% from peaks; Aurobind& Orchid are the key importing players.
• Artemisinin – Anti-malarial product; import price decline of 8% QoQ in Q2 and 50% from peaks; Ipca is the key importing player.
• CDA – Intermediate for Gabapentin; import price decline of 8% QoQ in Q2 and 30% from peaks; Solara and Divi’s are the key importing players.