Decline of Rupee - A boon for pharma? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • 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.

     

     

     
     
    Equitymaster requests your view! Post a comment on "Decline of Rupee - A boon for pharma?". Click here!
      

     

    More Views on News

    My conversation with Asad Dossani (The 5 Minute Wrapup)

    Apr 25, 2015

    An opportunity you should not miss out on.

    What could be common in You, Buffett and Archimedes? (The 5 Minute Wrapup)

    Apr 24, 2015

    Why urgency, hustle and hectic activity to come to conclusions may not lead to the best results for your investments.

    Zombies Gone Wild (The Daily Reckoning)

    Apr 24, 2015

    Why a healthy economy cannot be built with debt!

    The danger of getting obsessed about earnings per share (The 5 Minute Wrapup)

    Apr 23, 2015

    Focusing on growth in earnings per share alone could well be a recipe for disaster.

    Social Security and Zombyism... (The Daily Reckoning)

    Apr 23, 2015

    Why Zombyism is a curse!

    More Views on News

    Most Popular

    Trading with an Investor's Attitude: Part I(Daily Profit Hunter)

    Apr 14, 2015

    Asad Dossani discusses how to trade with an investor's attitude. To be a successful trader, it is important to focus on long term performance.

    TCS: Employee bonus hurts profits

    Apr 16, 2015

    TCS has reported a 1.1% QoQ fall in the topline and an decrease of 30.3% QoQ in the bottomline for the quarter ended March 2015.

    Dhokla, Dosa or Samosa... What's your investing type?(The 5 Minute Wrapup)

    Apr 13, 2015

    Do ethnic stereotypes and money making have anything in common?

    Why Modi's dream of acche din will continue to remain a dream(The Daily Reckoning)

    Apr 14, 2015

    India needs to create jobs if it wants to create sustainable economic growth. And for that to happen the ease of doing business needs to improve dramatically.

    Gruh Finance: Profits stable despite rise in provisions

    Apr 21, 2015

    Gruh Finance announced its results for the fourth quarter and financial year 2014-15 (FY15). The institution grew its income from operations by 25.4% YoY and the profits by 26.2% YoY during FY15.

    More
    © 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 investors. Before acting on any recommendation, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. 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.

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    S&P BSE SENSEX

    27,437.94 (-1.07%)
    Apr 24, 2015 (Close)
    View Detailed Quote

    MARKET STATS

    1. Go