Citi Sees Low Risk Of US Tariffs On Indian Pharma; Prefers Torrent Pharma, Divi's

Citi has assigned a low probability to the scenario of the US imposing tariffs on Indian pharmaceuticals, despite ongoing discussions. The brokerage firm analysed the potential impact of a 10% tariff, highlighting that companies with high exposure to US generics, such as Zydus, Dr. Reddy's Laboratories (DRL), and Aurobindo Pharma, could face a 9-12% Ebitda hit. This impact could reduce to 5-6% if part of the tariffs is passed on to buyers, although full pass-through is considered challenging.

Citi's analysis indicates that companies with lower exposure to US generics, including Torrent Pharma, Sun Pharma, and Divi's Laboratories, would be the least affected, with an estimated 1-3% hit to Ebitda. These companies remain Citi's preferred picks in the Indian pharmaceutical sector due to their diversified portfolios and lower reliance on the US generics market.

The report also notes that if tariffs are imposed, they may not be fully passed on to US buyers due to several factors. These include competition and industry fragmentation, healthy pre-R&D margins, and the influence of buying consortiums focused on lowering prices. Additionally, products facing competition from US players or those from non-tariff countries might not see any pass-through of tariffs.

Citi believes the probability of tariffs on Indian generics is low, citing the limited manufacturing of generics in the US, the high dependence on Indian generics, and the risk of drug shortages if Indian suppliers exit the market. The brokerage firm emphasises that tariffs, if not passed through, could make some Indian generics unviable for the US market.

Overall, Citi's outlook suggests that while the imposition of tariffs remains a low-probability event, the potential impact on Indian pharmaceutical companies varies significantly based on their exposure to the US generics market.