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Informist, Monday, Jun. 22, 2026

 

By Gunjan Rajput 

 

NEW DELHI – Indian pharmaceutical companies are likely to report a sequential decline in operating margins by up to 200 basis points in the June quarter due to higher raw material, packaging, freight, and energy costs, analysts said. The fall in margins is expected as the Strait of Hormuz remained closed since February-end due to the war between the US and Iran.

 

Most pharmaceutical companies maintain inventory covering two to three months of production, which cushioned the immediate impact of the disruptions caused by the war in West Asia. However, the war continued for more than three months, exhausting inventories, and forcing companies to buy costlier raw material. The full impact of elevated costs is expected to be reflected in the June quarter's earnings before interest, taxes, depreciation, and amortisation margin, analysts said.

"It is anticipated that pharma companies could witness a sequential EBITDA margin compression of around 100-200 basis points in Q1 FY27 (Apr-Jun), making it potentially the weakest quarter for margins this fiscal year," Sugandha Sachdeva, founder of SS WealthStreet, told Informist. While a few companies reported some margin pressure in the March quarter, the inventory buffers helped limit the impact, she said.

 

According to Sachdeva, higher procurement costs for active pharmaceutical ingredients and packaging expenses are expected to weigh on profitability in the June quarter. She said costs of packaging materials such as polyvinyl chloride and foil have risen nearly 40% since the war started, while logistics premiums, shipping, and air freight costs have risen 15-30%.

 

The impact would be more visible in the June quarter because companies follow a first-in-first-out inventory accounting method, said another pharmaceutical analyst with a Mumbai-based brokerage, who did not want to be identified. Companies were still consuming lower-cost inventories during the March quarter, and material procured after the energy and freight costs surged post the war is now being used in production, which will be accounted as expenses now, the analyst said.

 

Independent pharmaceutical analyst and GlaxoSmithKline Pharmaceuticals' former Executive Vice-President Salil Kallianpur expects a relatively lower hit of 30-100 bps on EBITDA margins, with large diversified companies likely to see a 40-70 bps hit. "Q1 (June quarter is likely to be the weaker quarter. Q4 (March quarter) largely reflected the initial disruption and inventory already in transit. Q1 (June quarter) will capture a full quarter of elevated freight costs, longer shipping routes, higher insurance costs and some inventory rebalancing," Kallianpur said. Export-oriented companies could face a relatively bigger impact because of their dependence on international shipping and freight routes, Kallianpur said. 

 

While Kallianpur expects a milder margin impact than some market participants, he agreed that the June quarter is likely to mark the peak of cost-related pressure on profitability. Cost-related pressures are likely to ease after the US and Iran signed a memorandum of understanding to reach a final agreement and even set up a high-level committee to oversee the peace talks.

 

The June quarter is likely to be the period of maximum margin pressure for the sector in the financial year 2026-27 (Apr-Mar), with gradual recovery expected in subsequent quarters if freight rates and crude-linked costs stabilise, both Sachdeva and Kallianpur said.

 

Analysts said recent progress in negotiations between the US and Iran could help improve sentiment around energy markets and supply chains. However, any benefit from lower crude oil prices or easing freight costs is likely to be reflected only with a lag, limiting the possibility of meaningful relief in the June quarter.

 

Analysts said most companies have refrained from raising prices due to intense competition in the domestic branded generics market. "Most companies are choosing to absorb higher costs rather than increase prices immediately. Market share is often more valuable than recovering a temporary increase in logistics costs," Kallianpur said.

 

However, Sachdeva cautioned that the ability to absorb costs is limited. If elevated input and logistics expenses persist for multiple quarters, companies may be forced to explore selective price increases, portfolio optimisation, and productivity measures to protect profitability.

Sun Pharmaceutical Industries Ltd., Dr. Reddy's Laboratories Ltd., and Cipla Ltd. may remain vulnerable to higher logistics and freight costs because of their global operations, said the Mumbai-based analyst, who requested anonymity. Kallianpur, however, said these companies remain relatively well placed to navigate the current environment because of their scale, diversified product portfolios, financial flexibility and strong domestic businesses.

 

"Among large listed companies, businesses such as Sun Pharma, Cipla and Dr. Reddy's appear relatively well placed because of their scale, product mix and financial flexibility. Among mid-sized players, companies with greater domestic exposure and lower dependence on imported APIs should be comparatively resilient," he added.  

 

The pressure on margins comes at a time when earnings growth in the sector has already moderated. Aggregate net profit of 15 pharmaceutical and healthcare companies in the Nifty 200 index fell 1% year-on year in the March quarter, marking the first decline in 13 quarters, according to data analysed by Informist.

Analysts expect margin pressure from higher costs to be temporary and see a recovery in profitability from the September quarter if geopolitical tensions continue to ease. "As a result, initial margin improvement may begin to emerge in Q2 FY27 (Jul-Sept), but a more meaningful recovery is likely only by Q3 FY27 (Oct-Dec), provided the ceasefire remains durable, shipping routes normalise fully, and there is no renewed geopolitical escalation," Sachdeva said.  End

 

Edited by Deepshikha Bhardwaj

 

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