New Delhi: An appreciating rupee is likely to shave off a few percentage points of profits at large Indian drug makers, some of which generate as much as four-fifths of their revenues through exports.
Drug companies will report results later in July and in early August. While the stronger rupee has been taking its toll across sectors, especially among computer services firms, drug industry analysts say some unique factors will help the sector in coping with the depreciating dollar.
One-off opportunities in drug launches and large foreign currency loans would have helped some companies in the sector during the April-June quarter, when the dollar fell by 6.8% against the rupee.
Firms including Ranbaxy Laboratories Ltd, Sun Pharmaceuticals Ltd, Lupin Ltd and Jubilant Organosys Ltd, which have collectively raised almost $1.1 billion (Rs4,455 crore) through foreign currency convertible bonds (FCCBs), will find some buffer against losses on exports. This will happen because with the rupee becoming more valuable against the dollar, servicing the debt becomes cheaper on the books. (Some members of the Bhartia family, which owns Jubilant, also have a significant stake in HT Media Ltd, the publisher of Mint.) Ironically, the worst hit in the sector are likely to be those companies that are debt-free and big net exporters, such as Cipla Ltd.
A study by brokerage CLSA Asia Pacific says a 1% increase in the rupee could lop off 1-1.5% from profits of pharmaceuticals companies. With 50-80% of their revenues coming from exports, the pharmaceuticals sector is just as vulnerable to currency appreciation as the information technology sector, the report notes. Reducing the earnings estimate by 2-12% for the big four—Ranbaxy, Dr Reddy’s Laboratories Ltd, Cipla and Sun Pharma, CLSA analysts Anshu Govil and Hemant Bhakru wrote that Ranbaxy (with a $440 million FCCB) will have to set aside lower amounts to service the foreign debt and significantly boost the April-June quarter results.
It is not just exports to the US that have been hit. While rupee appreciation has been the steepest against the dollar, by some 8% from January, it is also substantial against the euro and the rouble at 6.3% and 7.1%, respectively.
However, not everyone’s outlook is as gloomy. Earnings previews by five firms predict that profit could grow by 4-40% in the quarter for many firms on revenue growth forecasts of 6-25%. Angel Broking House’s pharmaceutical analyst Sarabjit Kaur Nangra predicts earnings to be “subdued”, but one that will “have pockets of growth with certain companies doing better than others.” Nangra outlined three such pockets: companies with foreign currency denominated debts, those with a greater part of revenues coming from the domestic market and multinational drug companies, who are net importers. “The last quarter would be muted for the Indian pharmaceutical companies barring a few like Ranbaxy, Wockhardt, Glenmark and contract research and manufacturing players, which would benefit from consolidation of the acquisition activities and new product launches,” Nangra said.
Among the multinationals, Aventis Pharma Ltd and GlaxoSmithKline Pharmaceuticals Ltd are likely to post earnings growth upward of 20%. While analysts are split over the sectoral growth estimates, there is near consensus on who are likely to be the quarter’s stellar performers and what’s taken them there. Industry No. 2 by sales, Ranbaxy seems to be the company every analyst has singled out, citing better operating margins, gains from a Romanian acquisition and lower provisioning while servicing foreign debt being the reasons offered for what is expected to be a robust quarter for the Gurgaon-based drug maker. Predictions for profit growth at Ranbaxy by five analysts averaged 61%, with estimated quarterly sales at Rs1,612 crore. US revenues from the cholesterol drug Pravastatin, which has limited competition, will continue to drive Ranbaxy’s growth in the next six months. Ranbaxy declares its quarterly results on 19 July.
Bigger rival Dr Reddy’s could be a gainer from product launches even though its growth in revenues could dip, say analysts. While the drop is due to unusually high revenues in the same quarter last year, profits will come from launching nausea drug Zofran (ondansetron) and anti-allergy medicine Allegra (Fexofenadine). Dr Reddy’s German acquisition Betapharm Arzneimittel GmbH will, however, be a drag on profitability, predicts a Kotak Securities’ study.
It could be a double whammy for Cipla, described by one analyst as “the worst hit among top drug makers”. A Merrill Lynch study attributes it to “continuing poor product-mix and lower export realizations on account of rupee appreciation”. Three of the six analysts polled for Cipla predict a 3-17% drop in net profit. Sun Pharma is expected to report steady numbers as foreign exchange gains, on servicing costs on its $350 million FCCB, neutralize the hit on its US exports. It reports results on 23 July. Integration of Ireland-based Pinewood and Dumex acquisitions could give a boost to Wockhardt Ltd, say analysts.
Ravi Krishnan contributed to this story.