Indian pharma companies will have to pass on higher tariffs to US customers or insurers

HDFC Institutional Equities’ Research Analyst (Strategy), Amit Kumar, CFA, shares his view on the pharma & healthcare sectors.

President Trump is threatening higher tariffs on pharma products. What will be the impact of this on Indian pharma companies?

President Trump is indicating to impose a lower tariff (possibly by 1^st August 2025) initially and provide some time (12-24 months) to pharma manufacturer to shift manufacturing facility in the US. We note Indian generics account for ~40% of drug imports in the US (~USD 9 bn in FY24; over FY15-25, US exports saw ~8% CAGR) and Indian companies like Zydus, Dr. Reddy’s, Lupin, Aurobindo, and Sun Pharma are heavily reliant on the US market – with US sales contributing 30-50% of total sales. In case of US tariffs on the pharma sector, it will impact both the countries, the US as well as India. Indian peers, already operating on thin margins in the US generics may struggle to absorb costs without passing them on to US consumers or insurers and face heightened risks of margin compression. In our view higher impact will be for companies like Aurobindo, Dr Reddy’s, Lupin, Sun Pharma, and Zydus Life. On other hand, companies like Cipla, Alkem and IPCA will have moderate impact, and Torrent Pharma and Mankind pharma will have minor impact.

US is the biggest market for generic drugs of Indian pharma companies. Do you see other markets where Indian pharma companies can diversify in a significant way to offset some of the adverse impact of higher tariffs in USA.

Over the last 8-10 years, most of the Pharma companies have diversified their geographical presence to reduce single country concentration risk of the US business (except for FY24 and FY25 which includes strong sales from gRevlimid). These companies started expanding in other key markets like Europe, South Africa, Brazil, and few other RoW markets. In our view, the diversification already started and leading companies are looking to expand the branded generic products in mentioned geographies while sustaining domestic business. We believe the tariff impact would gradually be offset with faster growth in India and ex-US market over the next 3-5 years.

What is your outlook regarding healthcare stocks for the next one year?

In healthcare sector we see hospital services is well positioned to see secular ~15% growth over the next few years on back of macro drivers (low bed/ doctor ratio per patient and rising non-communicable disease profile), bed capacity expansions, and improvement in operating metrics (occupancy, ARPOB, ALOS) which will drive the profitability. For diagnostic business to remain in 10-12% revenue growth trajectory but margins are expected to remain under pressure given price competition from new-aged players (increasing penetration of online companies) as well as network expansion strategy. Lastly, retail pharmacy will see steady growth on back of store expansion as well as strategy to increase private label products share which will help in margin expansion.

Pharma stocks are currently trading at an average P/E ratio of around 32.41. Healthcare stocks are currently trading at an average P/E ratio of 38. Are they overvalued? Do you see any correction coming in them?

US tariff will be a near-term overhang on Pharma sector, which may lead to some correction in the P/E ratio. However, with positive outlook for the mid-to-long term for the sector given focused strategy (1) to diversify geographical presence, (2) capital allocation (R&D) towards complex generics and specialty products, and (3) cost optimization to drive EBITDA margin.

On healthcare sector, the P/E ratio of 38x is higher largely due to re-rating across Max healthcare, Healthcare Global, Fortis Healthcare, and few other leading companies. We believe stock specific correction (Max Healthcare, Healthcare Global, and Aster DM) may come in near-term.

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Source: HDFC Securities Institutional Equities