X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma: The rising rupee impact - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 25, 2007

    Pharma: The rising rupee impact

    While the rupee has been on an appreciating trend since the beginning of 2007 reaching 40.58 levels, last week was witness to the Indian currency breaching the psychological barrier of 40 to trade at 39.80 levels. The US Fed taking the decision to cut interest rates by 50 basis points to 4.75% was certainly the prime reason that led to this sharp appreciation. This rate cut meant that the interest rate differential between the domestic interest rates and the US interest rates has widened causing the surge of Foreign Institutional Investors (FIIs) money into India.

    This rising rupee is expected to have a negative impact on export-oriented sectors such as software, textiles and pharmaceuticals. In this article, we shall take a look at both the negative and the positive impact of the rupee appreciation on the pharma sector.

    The challenges...
    Impact on revenues: In the last few years, domestic pharma companies have been increasingly focusing on the exports markets of the US and the Europe to capitalise on the generics potential and also to mitigate the long-term impact of the likely slowdown of product launches in the domestic market in the future. As a result, many of the top domestic companies have a strong exposure to the exports markets and the rise in the rupee is definitely expected to impact revenues in the near term. US being the largest pharma market, besides the big players, even the mid-sized players are concentrating on this market, if not directly, then through the partnership route (CRAMS for instance). Top pharma companies such as Ranbaxy, Dr.Reddy's, Cipla, and Wockhardt for instance derive around 60% to 80% of their revenues from exports.

    Impact on profitability: Given the margin pressure that the generics companies have to contend with in light of the increasing competition and brutal price erosion, the appreciation of the rupee is likely to further deal a blow and impact margins largely due to a dent in realisations.

    The other side of the coin...
    Fall in value of imports: Unlike the software sector, the pharma sector does enjoy the benefit of a natural hedge in the form of imports especially on the raw material front. Of late, pharma companies have been witness to increasing raw material prices. Many of them import intermediates (used for making APIs) from China, which is very strong in the manufacture of the same. However, China has curbed the export incentives for pharma exports amongst others (to control its trade surplus) and as a result, the import of intermediates has become expensive thereby leading to a rise in raw material costs. Thus, while raw material prices are increasing, the rising rupee is likely to cap the increase to a certain extent going forward thereby easing the pressure on margins.

    Impact of foreign borrowings: Given the intense competition in the generics market, domestic pharma companies like their global generics peers are looking to acquire scale to counter this pressure and thus have been very active on the acquisitions front. Not to be left behind, players focusing on the CRAMS model have also been acquiring companies abroad. However, the price paid for the same has been a tad on the higher side and many of them have been taking recourse to debt to fund these acquisitions. The most popular have been the raising of zero coupon FCCBs and ECBs. As far as the former is concerned, while companies do not have to pay interest, the appreciating rupee could ease the payment pressures during the time of redemption (assuming that there is no conversion). Also, companies are expected to benefit from the mark-to-market forex gains. In the case of ECBs, the rising rupee could reduce the interest expenses going forward.

    To conclude...
    While US has and will be a major market for domestic pharma companies, some of them are turning their attention to Europe, which could reduce the dependence on dollar denominated revenues to a certain extent, going forward. Having said that, while the pressure of the rising rupee is here to stay in the near term atleast, those companies which continue to launch new products, expand geographically and control costs will be in a better position to withstand the pressure going forward. Also, at the end of the day, while it is not easy to completely eliminate forex risks, it all boils down to what prudent risk management measures pharma companies are adopting to hedge against the same.

     

     

    Equitymaster requests your view! Post a comment on "Pharma: The rising rupee impact". Click here!

      
     

    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE HEALTHCARE


    Aug 18, 2017 (Close)

    S&P BSE HEALTHCARE 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS