Dec 14, 2011|
Decline of Rupee - A boon for pharma?
For the last couple of weeks, the steep decline in the value of rupee against the dollar and some other European currencies has continuously made headlines. The European sovereign turmoil coupled with political inaction and rising fiscal deficit in India have been some of the reasons why the Rupee has fallen so steeply. So severe has this fall been that Rupee is now trading at a multi-year low and has been the worst performing Asian currency. Rupee has fallen from levels of Rs 46-47/US$ to Rs 53 currently. And given the economic scenario currently, a further fall in the Indian currency cannot be entirely ruled out.
While creating export opportunities, the quick decline in Rupee has also created challenges for some businesses. For the pharmaceutical sector, falling rupee brings good news for exporters in the medium term. However, it also brings many challenges. Here are some of them:
Existing hedging contracts to limit revenue boost: The size of the Indian pharmaceutical industry is estimated to be around US$ 20 bn, with exports accounting for nearly 45% to 50%. The decline in the Rupee should thereby help the pharma exporters earn higher realizations. However, most large companies have locked (hedged) their export sales in advance when the rupee traded at Rs 46-47 against the US dollar. Hence, the decline in Rupee will not bring any cheer for these companies in the short run. If the rupee remains at this level for a couple of months, the benefits will then start accruing for large pharma companies.
Raw material imports to be costlier: A depreciating Rupee surely helps pharma exporters get better realisations in the long run. However, if the imports are considered, benefits from exports will partially get offset by costlier imports. Indian pharmaceutical industry fulfills 70% of its raw material requirements through imports from other countries. Imports from China are highest at US$ 4 bn per year with the rest from other countries. Most bills are settled in dollar terms and the recent decline in the Rupee will mean imports will get costlier in the near term.
Higher interest on foreign loans: Quite a few companies in the Indian pharma industry have exposure to foreign currency convertible bonds (FCCB). As this is a foreign currency loan, the repayment liability arising out of this can be much higher due to decline in the Rupee against the dollar. It will also impose a higher interest outgo every quarter (provided it is not zero coupon) requiring companies to make provision for mark-to-market losses. This then puts a severe strain on profits.
Renegotiation of existing contracts: As the US and European pharmaceutical markets may see a slowdown due to their economic problems, there could be price pressure on their suppliers including India. On the backdrop of a weaker Rupee, overseas buyers may renegotiate some of their existing contracts and thereby impact the higher expected realization of Indian companies.
Thus, a declining Rupee and that too at a steep certainly has an impact on India Inc, and the pharma sector is also not immune from the same. At the end of the day, those companies which have followed appropriate hedging strategies and have lesser amount of foreign debt on their books will have an edge over their peers especially when there is increased volatility in the forex market.
More Views on News
Jul 14, 2016
Tata Consultancy Services (TCS) has declared results for the quarter ended June 2016. The company has reported a 3% QoQ increase in consolidated sales while the consolidated net profit was up 0.3% QoQ.
Jul 8, 2016
Tata Motors Ltd has reported a 19% YoY and 202% YoY growth in sales and net profits for the quarter ended March 2016.
Jul 4, 2016
Idea Cellular has reported a 12.4% YoY growth in the topline and a decrease of 0.4% YoY in the bottomline for the quarter ended March 2016.
Feb 24, 2017
If you are seeking that extra return and do not mind the short-term volatility, then opportunity funds are for you.
Feb 24, 2017
Why does the US economy stagnate? Because fewer people are learning. The zombies don't have to learn. The cronies learn the worst lesson of all: that crime pays.
More Views on News
Feb 11, 2017
A wealth-building strategy is more than just about how to pick good stocks.
Feb 14, 2017
Apurva closed a trade with gains of 18.24% for his Swing Trader subscribers. But he's not happy about it. Find out why.
Feb 21, 2017
Why buybacks may not always be a tempting proposition.
Feb 15, 2017
The investors are writing down their investments in these firms.
Feb 21, 2017
Will the proposed buyback change the fortunes of TCS?
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. Use of the information herein is 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 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: +91-22-6143 4055. Fax: +91-22-2202 8550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407