Mumbai: The Indian drug industry, generally considered resistant to economic downturns, suffered in the December quarter, as net profits fell by 23.7% and market capitalization declined by 21.4% compared with the year-ago period, its worst performance in 12 quarters.
However, the decline in earnings was largely due to currency fluctuations and a weak capital market. A Mint analysis of 111 listed firms for the October-December quarter showed that net profits slumped to Rs1,258 crore from Rs1,649 crore in the same quarter a year ago. Net sales for the quarter grew 12.2% to Rs12,692 crore.
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“Going by the reported numbers, the industry has shown a dismal performance,” said Vikas Sonawane of Religare Securities Ltd. “But majority of the companies have posted low profits due to exceptional items such as forex losses and, to a certain extent, on interest costs.”
“Several of the top players in the sector had to report huge mark-to-market loss as many of them had exposure to hedging and derivatives in a big way,” said Sujay Shetty, associate director for pharmaceutical practices in India for international consultancy firm PricewaterhouseCoopers. A performance analysis of the 22 drug firms listed on the Bombay Stock Exchange’s Healthcare index showed that their market capitalization for the quarter declined 21.74% to Rs1,10,592.8 crore from Rs1,41,319.3 crore of the September quarter.
The index includes firms such as Ranbaxy Laboratories Ltd, Sun Pharmaceutical Industries Ltd, Cipla Ltd, Glenmark Pharmaceuticals Ltd, Dr Reddy’s Laboratories Ltd, Biocon Ltd and Piramal Healthcare Ltd, among others. “The stock market reacted to these shares because the companies’ reported earnings did not deliver up to the high expectations,” said Sonawane of Religare Securities. Shetty attributed the drop in several pharma scrips because of stock dumping due to general concerns related to corporate governance and hedging of shares.
High mark-to-market losses due to currency hedging and higher interest costs on foreign currency loans due to currency fluctuation were the key factors that dragged down profits for most firms.
Eliminating one-time income in the same quarter a year ago for some firms showed they had flat or, in some cases, negative earnings. Mark-to-market accounting is the process of assigning the current market value to assets and liabilities on a company’s books.
According to Shetty, this was the most important factor that drove the reported net profit down, though other factors such as high interest costs, working capital squeeze and margin pressures in key export markets were also present during the quarter.
Most of the drug firms maintained modest growth in operations in the local and overseas markets; one-time gains and losses such as market exclusivity in the high-margin export markets and absence of other income through exceptional items made significant impacts in the performance of top players such as Dr Reddy’s, Ranbaxy and Glenmark.
Dr Reddy’s, the country’s second largest drug maker by sales, gained 145% rise in consolidated net profit to Rs159.16 crore from a one-time opportunity of the exclusive launch of the generic version of GlaxoSmithKline Plc.’s anti-migraine drug Imitrex in the US.
Ranbaxy, the country’s largest drug maker by sales, reported a stand-alone net loss of Rs22.25 crore, compared with a net profit of Rs44.63 crore in the year-ago quarter due to foreign exchange fluctuations and a US import ban on 30 of its products.
Glenmark’s consolidated net profit plummeted by 70.9% while consolidated net revenue declined to Rs581.38 crore from Rs679.39 crore. It also posted a drop in revenue growth mainly on account of Rs179.29 crore out-licensing revenue collected in the same quarter of the previous year.
Graphics by Sandeep Bhatnagar / Mint and Ahmed Raza Khan / Mint