Drug inventory remains below pre-GST level

Business Standard By Aneesh Phadnis October 8, 2017 00:01 IST

A reduction in inventory level would mean lower working capital requirement

Drug inventory with distributors rose to 30 days at end of September, but still remains below the pre-GST level as the trade channel looks to reduce working capital requirement.

In the run-up to the implementation of GST, the inventory level of medicines with distributors fell to 17 days at the end of June from 40 days at the end of May. This has now increased to 30 days, according to AIOCD-AWACS, the market research wing of All India Organisation of Chemists and Druggists. GST came into effect from July 1.

“Restoration of inventory levels to the pre-GST level may not happen though there could be a gradual increase in inventory days,” AIOCD-AWACS director Ameesh Masurekar said.

Industrywide average inventory days
May-end: 40
June-end: 17
July-end: 22 
September-end: 30

A reduction in inventory level would mean lower working capital requirement. The halving of inventory levels in July did not lead to disruptions in medical supplies and hence distributors may not hold inventory of 40 days, it is felt.

An another industry source said that the focus of stockists in the last couple of months has been more on compliance rather than business growth and they have made investments to ensure they follow all the GST procedures.

With the exception of life-saving drugs and a few other products, medicines were included in 12 per cent tax rate, which was higher than the prevailing tax rate of 9-10 per cent. Stockists cut down the inventory level to minimise the impact of tax increases. Companies offered higher incentives and increased the credit period to ensure sufficient stock in the market.

While trade margins in real terms remain same (around 16-20 per cent to retailers and 8-10 per cent to distributors) an increase in tax outgo has resulted in the reworking of purchase and sale prices.

“There has been an impact on trade margins in absolute terms as companies have not increased the maximum retail price of pharmaceutical products. Stockists may have reduced offtake to lower working capital requirements,” said Kirti Oswal, partner, B S R & Associates.

According to a Quintiles IMS survey held in August, both distributors and chemists said teething problems of GST implementation would last 1-3 months and then normalcy would be restored.

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