Indian pharma distributors shoulder the full debt finance obligation, secured exclusively against equal collateral, and rely on working capital cycle of up to 75 days (2.5 months) to operate efficiently. Limited access to additional capital infusion hampers the growth potential of pharma distributors.
How does growth impact the working capital requirements of a pharma distribution business?
For a company achieving a monthly turnover of ₹10 lakh with a 2% profit margin, the annual Profit After Tax amounts to just ₹1,59,000.
However, to grow the business by 12% and reach an average monthly turnover of ₹11.2 lakh in Year 2, the additional working capital requirement is a significant ₹3,00,000.
This illustrates that pharma distribution businesses cannot rely solely on internal accruals or profits to fund the working capital needed to sustain industry growth. External financing solutions are essential to bridge this gap and enable expansion.
Real Estate Growth< Pharma Market Growth
Led to the Growing Working Capital Crisis since 2014
Pharma Distributors preferred option for Working Capital has been LAP - Loan Against Property. So generally their offices / work locations and at times, even their residential properties are pledged to banks as a collateral to get Working Capital Loans.
During the first decade of the century, as well as till 2014, the Property Price growth was equal to or higher than the Pharma Market growth. So on the same pledged property, by value increase, the Distributor used to get higher and higher collateral value every year and working capital limit was revised upwards to facilitate business growth.
However since 2014, the property price growth (and thereby the working capital limit) is much slower than Pharma Market Growth, thereby pushing Distributors to costly Unsecure Capital (for the growth part) which comes in category of Personal Loan and starts at 14%, although some banks mix the asset collateral with unsecure part to give overall 11%.
To ensure business growth, Pharma Distributors need adequate Working Capital, factoring in market growth and within + 1% of Loan Against Property (LAP) rate but Without Collateral so they can stock adequately the full range and provide proper credit to retailers, thereby ensuring a win-win proposition for them & company so they can stock adequately the full range and provide proper credit to retailers, thereby ensuring a win-win proposition for them & company