India’s online pharmacy sector is on track to significantly improve its financial outlook, with operating losses set to drop below 10% next financial year from over 30% recorded in fiscal 2023, according to CRISIL Ratings. This positive shift is largely due to the sector's strategic pivot toward high-margin products and operational efficiencies.
Currently, e-pharmacies contribute only 3-5% to India’s retail pharmacy market, which is valued at approximately Rs 2.4 lakh crore. The unorganized sector dominates this market, comprising about 85% of the total share. The substantial difference when compared to developed countries, where online pharmacies account for 22-25%, suggests significant growth potential for India’s online pharmacies.
Poonam Upadhyay, Director at CRISIL Ratings, explained, “E-pharmacies are eyeing sustainable growth by diversifying their portfolios to include high-margin segments such as wellness products and medical equipment, which are expected to make up 40% of sales next fiscal year, up from about 30% currently.” This diversification marks a notable shift from previous business models heavily reliant on aggressive discounting.
Players within the sector have begun reducing key operational costs tied to discounting, delivery, distribution, and employee expenses— collectively termed DDDE. Currently, these expenses account for around 65% of revenues; by next fiscal year, companies aim to cut this down to below 35%, fostering profitability and narrowing losses.
Despite these promising indicators, the online pharmacy sector is still grappling with challenges posed by high operational costs and intense market competition. The necessity for substantial initial investments, coupled with significant cash burn rates during growth phases, results in continuing cash losses. Nonetheless, the forecast calls for revenue growth of 9-11% over the coming fiscal years, reflecting the industry's recovery following nearly doubled revenues during the COVID-19 pandemic.
The operating losses represent pivotal growth opportunities and highlight the urgent need for timely equity funding. It is estimated the sector will require approximately Rs 2,300 crore over the next two financial years to maintain its growth momentum. Since FY20, over Rs 9,200 crore has already flowed to the sector, primarily from promoters, private equity investors, and venture capital sources, underscoring the necessity for financial backing as competition continues to increase.
Naren Kartic K, Associate Director at CRISIL Ratings, pointed out, “Ongoing losses underline the necessity for strong financial backing from promoters and investors. While bank loans are expected to be limited to working capital financing due to regulatory pressures, there remains potential for banks to support online pharmacies well-established by their promoters.”
The movement away from heavy discounting practices marks a strategic adjustment as the sector matures. By channeling resources away from discounting and reallocting them to high-margin product segments, e-pharmacies aim to improve their bottom lines significantly.
The regulatory environment presents its own set of challenges, with potential changes and uncertainties possibly affecting the operational framework of online pharmacies. Draft rules proposed by the Ministry of Health and Family Welfare aim to amend the existing Drugs and Cosmetics Rules, 1945, with regulations governing the online sale of medicines. Such legislative changes add another layer of complexity to the sector's operations.
Overall, India’s online pharmacy sector is gearing up for promising growth characterized by strategic shifts toward high-margin products and operational streamlining. The necessity for substantial funding remains, reiteratively marking them as key players to watch as they evolve within this fast-changing market.
