Mumbai: For information technology (IT) and pharmaceutical companies that earn much of their revenue in dollars, the strengthening rupee threatens to be an additional headache on top of existing ones on visas, outsourcing, pricing and regulatory issues in the US.
The rupee on Wednesday touched 64.9137 to the dollar, a level last seen on 23 October 2015.
For export-oriented companies, such as those in the information technology and pharmaceutical sector, a stronger rupee means lower earnings in local currency terms.
While its near-term impact is sentimentally negative, analysts say they would wait to see if the rupee’s strength is here to stay.
“While the frenetic legislative bill filings related to visa reform seems to have cooled off, investors also await cues as to whether this headline risk is impacting client decision making and deal flow—a concern highlighted in certain quarters,” Emkay Global Financial Services Ltd said in a note on Thursday.
Continued foreign investments in the local equity and bond markets have buoyed the rupee.
So far this year, the BSE IT index and BSE healthcare index have risen 2.18% and 3.77%, respectively, underperforming the benchmark 30-share Sensex, which has gained 11.35% in the same period.
Around 48 of the 56 IT companies and 46 of the 67 healthcare companies in the respective sectoral indices have underperformed the benchmark Sensex so far this year.
The underperformance has sustained for a while.
In 2016, while the BSE IT and BSE healthcare indices lost 8% and 12.9% respectively, Sensex gained nearly 2%.
“Recent sharp INR strength is also beginning to emerge as an irritant and needs to be monitored especially in the context of traditional margin levers having limited force going forward,” Emkay Global analysts Manik Taneja and Ruchi Burde said in the note on Thursday.
The latest round of regulatory troubles of Divi’s Laboratories Ltd and Dr. Reddy’s Laboratories Ltd indicate Indian drugmakers also face a long and uphill struggle to meet quality standards set by the Food and Drug Administration (FDA) of the US, which is the world’s largest drug market, Mint had reported on 22 March.
“Rupee has gained because all EM (emerging market) currencies, with the exception of China have rallied. It is more to do with broader emerging market currencies rally. Whether it is here to stay, it is difficult to say for now,” said Vaibhav Sanghavi, co-chief executive officer of Avendus Capital Public Markets Alternative Strategies Llp, a hedge fund.
“However, the development is not exciting for IT and pharma sectors, which are already reeling under pressure,” added Sanghavi.
Apart from persisting regulatory hurdles, pharmaceutical companies are also taking a beating due to pricing pressures in the US.
The issue gains prominence because of the magnitude of the impact it could have on thee revenue of these companies.
For most leading pharmaceutical companies, the US market accounts for at least half of their revenues.