‘Companies need to proactively hedge their risks and minimise impact on their earnings’

The Indian rupee has depreciated significantly against the dollar, raising anxieties amongst many stakeholders in the country. Year to Date (YTD), rupee has depreciated ~21 per cent against USD. At the same time, the Prime Minister of India, Dr Manmohan Singh recently made a public statement, “To some extent depreciation can be good for the Indian economy”

So, what is the true impact? We looked at this question from the perspective of the Indian pharma industry. Here are some of the key points;

Rupee depreciation does not seem like an India-specific phenomenon even though it looks like India has been more seriously impacted. The below chart show the YTD currency performance of BRICs vs USD

Also, this is not the first time that Indian rupee/ emerging markets currencies have depreciated significantly. In 2008, Brazil currency depreciated ~34 per cent against USD followed by Indian rupee which depreciated ~24 per cent.   

During these periods, the Indian pharma market (IPM) market growth saw a short term dip but bounced back significantly in the following year (INR terms). While the dip and the growth cannot be attributed to currency fluctuations alone, it is useful to keep the macro picture when reviewing the impact. The key point being that currency depreciation does not imply a gloom and doom scenario for the industry.

• In general, Indian pharma exporters have an opportunity to benefit from rupee depreciation.

Indian companies get paid in dollars when they export. With a strengthened dollar, they make a better top line which gets directly translated to its bottom line in rupee terms at the same time it allows them to compete for more business on price. Ability to handle pricing pressures is especially valuable in relatively commoditised spaces like the Contract Research And Manufacturing Services / Active Pharmaceutical Ingredient (CRAMS/API) segment where the sector is facing stiff global competition from countries like China, Brazil. Of course this advantage will not equally apply across all sectors because some of the BRIC countries have depreciated comparably.

• MNCs/private equities waiting to invest in India may find it cheaper to raise stakes in the country.

Rupee depreciation might attract foreign direct investment (FDI) in pharma sector as cheaper currency makes it easier to invest in India for those planning to raise stakes in the country. Suddenly, valuations look attractive and spur investment action. However these factors might have a muted effect over the short term to the extent the buyers/ sellers have hedged themselves. e.g. Lupin has hedged 35 per cent of receivables for 18-20 months, Dr Reddy has outstanding cash flow hedges worth US$ 480 mn hedged between ` 56-59 for a period of 18 months. (Source: Company quarterly earnings call transcript)

• On the flip side Indian companies intending to expand globally having plans to do global transactions will find it more expensive.

Rupee depreciation might put inorganic growth plans on hold (as currency depreciation makes it more difficult to do global transactions)

• MNCs that have already invested in the country may further hesitate to invest in India:

As they see one more hindrance in their way after the recent government price caps through new exploration licensing policy/ weak intellectual protection law (Novartis denied Glivec patent: Novartis said the decision “discourages future innovation in India”).

• Companies saddled with external cost and debt commitments will get impacted:

As their effective cost of borrowing has gone up significantly For e.g. Aurobindo Pharma has forex loans of $600 million which has resulted in increase in total liabilities. At the same time, companies that rely heavily on importing material will be impacted significantly, if not properly hedged.

IMS view on the Indian market is focused around its fundamentals i.e. country demographic trends, public spend trends, disease burden trends etc.- all of these factors continue to point towards long term growth of the industry. Companies need to look beyond just the immediate term outlook and focus on these underlying growth drivers since currency fluctuations do not typically impact fundamentals. The bigger risk may be in hesitating and incurring opportunity costs, given the fast evolving nature of the Indian market. In the same breath, over the short term, companies need to proactively hedge their risks and minimise impact on their earnings, since these are factors beyond their control.

– Neeraj Vashisht, Senior Principal, IMS Consulting Group