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Business News/ Industry / Manufacturing/  Ranbaxy’s derivative losses may cross $1 bn
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Ranbaxy’s derivative losses may cross $1 bn

Drug maker may post forex loss of $200 mn in September quarter because of wrong-way bets on rupee hedges

Ranbaxy Laboratories chief executive Arun Sawhney. Photo: Bloomberg (Bloomberg)Premium
Ranbaxy Laboratories chief executive Arun Sawhney. Photo: Bloomberg
(Bloomberg)

Mumbai: Ranbaxy Laboratories Ltd may have made its peace with the US—representing a market of nearly $1 billion—by settling cases with the US department of justice, but its woes are unlikely to end. The drug maker may post a foreign exchange loss of as much as $200 million in the September quarter because of wrong-way bets on currency hedges, analysts say.

That loss may take its cumulative loss on account of derivatives to over $1 billion.

India’s largest drug maker signed derivative contracts worth about $4 billion in 2006 to hedge risks, but has had to provide for losses in every quarter since 2008, whenever the rupee has dropped below the hedge level.

The cumulative derivative loss was $800 million as of 30 June, Ranbaxy president and chief financial officer Inderjit Banerjee said in an interview last week. “The remaining loss will continue reflecting in the books at least for the next two years if the rupee remains sliding," he said.

The sharp fall in the rupee over the last two months has increased the amount to over $1 billion, analysts said.

Coupled with a $550 million foreign currency loan taken to fund acquisitions, including that of Romania-based Terapia SA for $324 million in 2006, the drug maker’s margins will continue to be under pressure for at least the next 8-10 quarters, the analysts added. Since 30 June, the rupee has fallen 13.7% against the dollar.

Ranbaxy had taken the hedges in the 41-42 a dollar range in 2006 with the derivative contracts, said an analyst who did not want to be named. “The forex loss in the first quarter of fiscal 2012 was 345 crore on hedges, wherein the rupee had depreciated about 4% during that period. For every 1% depreciation of rupee, the company’s forex loss comes to around 90 crore," added the analyst.

A 13.7% depreciation in the rupee since 30 June, the analyst said, translates to cumulative forex losses of about $1.04 billion for Ranbaxy.

For Ranbaxy, the outstanding amount of foreign currency loan (excluding the maturity every month) has a large bearing on the interest cost, said a consultant from a foreign corporate advisory firm who did not want to be named.

In the past few quarters, accrued interest has fallen while other income has risen, offsetting the loss from borrowings (pre-dominated in dollars), the company’s financial statements show.

“But a sharp decline in rupee will again take away this benefit," added the consultant. The rupee recovered over 3% on Thursday to close at 66.60.

“In spite of the improvement in operating profitability led by first-to-file sales (and) fixed overheads on the US food and drug administration (FDA) resolution, Ranbaxy’s wrong bets on derivatives remains a pain area for the company," said Sapna Jhavar, a senior analyst with Reliance Securities Ltd, in a report in May.

First-to-file opportunity is a high-margin business option for a generic drug maker in the US when it seeks the first approval to sell a generic drug in that market with six-month exclusivity.

This mechanism is known as “Para-4" filing—the generic drug maker has to file for marketing approval with FDA, either without infringing the rights of an already-patented drug, or to enable the launch of the low-cost drug immediately after the patent expiry.

As part of cost-saving measures, Ranbaxy has initiated cutting its workforce in some non-core areas, mainly in production and administration, besides reducing its focus on low-margin markets, including some overseas ones, according to two people familiar with the development. Both did not want to be named.

A company spokesperson declined comment on these developments.

Ranbaxy, which faced an import ban by the US drug regulator on two of its key export-oriented manufacturing facilities in India, is in the process of building parallel capacities in India and the US.

“In the last three years, we have made filings from Ohm and Mohali (the new manufacturing plants in the US and India, respectively). The filings from Ohm and Mohali are totalling around $6 billion of brand value at present," chief executive Arun Sawhney said in a 13 August interview.

“The same shortcomings won’t be troubling the company in the future," Sawhney said, adding that the company has invested $300 million in upgrading facilities, and employing consultants to impart “the correct skill sets".

“I cannot undo what was in the past, but I can give the world an assurance of what Ranbaxy is doing today and will continue to do so in the future," he said.

Ranbaxy shares fell 0.16% to close at 417.90 per share on Thursday on BSE, while the benchmark Sensex gained 2.25% to end at 18,401.04 points. The BSE Healthcare index gained 1.62% to close at 8,825.01 points.

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Published: 29 Aug 2013, 11:51 PM IST
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