Mar 18, 2008|
Credit crisis, Indian rupee & more...
With increasing weakness and turmoil afflicting the Indian stock market last week, the scenario at the start of this week has been no different. Monday was witness to yet another day of slump on the bourses and the reason for this was unsurprisingly attributed to the slowdown in the US and the escalating impact of the subprime crisis. The latest development has been that of JP Morgan & Chase offering to buy one of Wall Street's top investment banking firms Bear Stearns. In fact, Bear Stearns was one of the first to be impacted by the subprime fiasco, when two of its hedge funds collapsed triggering signs of a credit crunch with other major banks reporting huge losses as well. As per reports, JP Morgan has put forth a price of US$ 2 per share, which is considered to be a mere fraction of what Bear Stearns was once worth. The Federal Reserve has provided a funding of US$ 30 bn and has cut the discount rate by 0.25%. Further, it is expected that it would cut the benchmark interest rate in its monetary policy meeting today.
The fact that the Fed has been frantically taking steps to infuse life into the crippled financial system speaks volumes of the deepening of the credit crisis. To compound this problem, a weakening dollar and rising energy and food prices are keeping Americans and along with them the rest of the world on their toes. Asian markets including India are mirroring the trends in the US and European markets and while there rages a debate regarding 'decoupling', the fact remains that those Asian economies including India, wherein FIIs have poured in bountiful sums of money, are now facing the heat as these very FIIs are pulling out from emerging markets to protect their losses in the US.
The Indian rupee has depreciated from the Rs 39.25 levels it had reached at the start of the year against the US dollar despite the latter sliding against other major currencies of the world. This could be attributed to the flight of FII money from the Indian stockmarkets against the backdrop of an unfolding global credit crisis. In the month of March 2008 alone, FIIs have sold equities to the tune of US$ 746 m. It must be noted that the sharp appreciation of the rupee against the dollar since last year was influenced not only by the weakening dollar but also by the surge of FII money into the Indian stockmarkets on the back of the promise of 'India growth story' and the RBI choosing to stay on the sidelines and not intervening in the forex market to curb rising inflation. With the inflation now touching 5%, the Indian stockmarkets struggling to grope for direction and crude prices touching new highs, the rupee seems to be bogged down by downward pressure. That said, a consistently slumping dollar might cap any sharp depreciation of the rupee going forward.
Demerger of R&D, settling patent suits and focus on CRAMS are the three themes that have been making news as far as the Indian pharma
companies are concerned in recent times. The increasingly competitive environment in the US and some of the European generics markets has prompted all these three business initiatives. The aim behind the R&D demerger is to enable the separately listed R&D company to avail of funding either through out-licensing route or through private funds, thereby paving the way for the main company to cut costs and improve margins. Settling patent suits is proving to be an effective tool in curbing the uncertainty associated with the outcome of the court cases and guarantees the challenging generics company some semblance of visibility in terms of revenues and also curtail rising legal costs. India's low cost advantage, superior process and chemistry skills along with better stability in revenues from this model as compared to generics have brought CRAMS players into the limelight in recent years.
Having said that, tough pricing conditions in the US and some of European markets do not mean that one can write off the generics sector as the fundamentals (an ageing population, pressure on the government to reduce healthcare costs and more drugs losing patent expiries) continue to remain strong. Thus, the prescription for sustaining revenues and profitability in the generics market is cost competitiveness, niche products focus, widening geographical reach, continuous product flow and consolidation, the latter at reasonable valuations of course.
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