‘Rupee depreciation is expected to increase manufacturing costs’

The rupee’s weakness unfolded when it depreciated over 16 per cent against the US dollar between January 2013 and July 2013. With the rupee expected to fall further, its impact on the pharma industry is cut both ways. The Indian pharma industry is majorly an export oriented business with exports contributing nearly 50 per cent of the revenues. Since the US is the major export market, depreciation of rupee against the dollar will result in cash inflows for pharma companies that have a majority of their sales in US.

However, the extent to which US sales can positively impact the profitability of these companies is questionable, because the leading participants ‘hedge’ their revenues or cash flows, by locking into a fixed exchange rate for a portion of their revenues. Companies like Sun Pharma, Cipla and Divi’s Labs realised quick gains compared to other companies because of their favourable hedging policy.

Another key factor influenced by rupee depreciation is the debt held in foreign currency by pharma companies; interest and loan repayments in US dollars will negatively impact the earnings of these companies. Aurobindo Pharma, Jubilant Life Sciences, Glenmark, Shasun and Ranbaxy have a significant portion of their debt in foreign currency, so export gains will be partially hindered by debt and interest payments. If these companies have not hedged their loans at fixed dollar rates they will have to pay back at a higher dollar conversion rate than those at which they acquired the loan.

Rupee depreciation is expected to increase manufacturing costs, primarily for companies, which are dependent on imports for raw materials. However, the impact is very mild for major companies because imports are mainly from China. A depreciating rupee coupled with increasing price of raw materials will raise input costs for small pharma companies that primarily cater to the domestic market.

Amidst strong earnings in the export market, the revenue and profit growth of the companies in domestic market will slow because of the new drug pricing policy. Therefore, the slump in domestic sales is expected to slightly offset the gains from export business.

Moreover, currencies of other emerging economies like Russia, Brazil, and some African countries have also depreciated over the past few months. Indian pharma companies have made their presence felt in other emerging economies like Brazil, Russia, etc. Dr Reddy’s in Russia, Lupin in Japan and Torrent in Brazil are a few examples. So the net effect of export gains from depreciating rupee are expected to be partially neutralised by reduced returns from sales in other emerging economies.

Impact of rupee depreciation on the pharma industry is not an open-and-shut case, the impact can only be assessed by the end of second half of 2013 because it is also expected that the buyers in exporting countries will have higher negotiation power and they might pitch for more discounts, which can reduce the margins of these export-oriented pharma companies.

– Dr E Saneesh, Research Analyst, Business & Financial Services, Healthcare, Frost & Sullivan