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Wednesday, June 19, 2013

Rupee skating down, Glenmark, Ranbaxy feel the heat

This story first appeared in DNA Money edition on Wednesday June 19, 2013.

The depreciating rupee is set to negatively impact the profitability of pharma companies like Glenmark and Ranbaxy this quarter.

Going by Barclays Capital, the two companies are set to take a hit of 38% and 11%, respectively, in their earnings per share (EPS).

“We expect Glenmark and Ranbaxy to observe net forex losses due to high forex loans and significant amount of outstanding hedges,” Balaji Prasad and Rohit Goel, analysts with Barclays Capital, said in a note.

“We expect Ranbaxy to be impacted the most on a cash EPS basis due to derivative losses on its $962 million of derivatives at the end of the quarter ended March. In addition, Glenmark’s cash EPS is also expected to be affected largely due to interest liabilities on its foreign currency debt,” the duo noted.

EPS serves as an indicator of a company’s profitability and is calculated as net income minus dividend on preferred stock divided by average outstanding shares.

Glenmark officials did not respond to a questionnaire emailed on Monday.

Ranbaxy refrained from sharing company specific information, but said the rupee depreciation would improve the competitiveness of the Indian pharmaceutical industry where exports are concerned. “However, in the immediate future, companies that have relied on dollar financing will need to consider the impact of the depreciation in its financial statements,” said Indrajit Banerjee, president and chief financial officer, Ranbaxy.

In case of a net rupee depreciation of 11% (60/$) in this quarter, the analysts said the pecking order would remain the same. However, the negative impact for Glenmark and Ranbaxy would increase to 17% and 58%, respectively.

Among companies that are expected to see a gain in EPS due to a the rupee fall this quarter are Sun Pharma (5.5%), Cipla (3.3%), Dr Reddy’s (1.9%) and Lupin (1.7%).

“At a broad level, the weakening of the rupee is a sign of the pressures we are facing on the fiscal and trade deficit front; it does weaken the government’s efforts at increasing foreign inflows and could impact overall economic health,” said Ramesh Swaminathan, chief financial officer, Lupin Ltd.

The Barclays analysts noted that Lupin continues to perform with a 59% year on year growth in April on the back of market share gains across key products like Cefdinir and Lamivud, in addition to sustained share in key products like Fenofibrate and Ziprasidone. “Eleven Abbreviated New Drug Application approvals in the last three months reaffirm our confidence on Lupin’s strong future product pipeline.”

Swaminathan added that whilst the rupee weakening in general helps exporters achieve better realisations, the fact remains that this volatility takes most of them by surprise since they would have covered their exposures to some extent only; and that hedge might not ultimately result in gains.

“At Lupin, we have been prudent in achieving a balance between hedge and exposures and have calibrated our approach to ring-fence ourselves from this volatility. Our hedge percentage will pay dividends were this depreciation to continue,” said Swaminathan.

Barclays’ coverage group (comprising Ranbaxy, Glenmark, Sun Pharma, Cipla, Dr Reddy’s Laboratories and Lupin) generated 34.2% of sales from the US region last fiscal and the analysts expect it will continue to be in the same range in the current one. The report said these companies also incur considerable operational expenditure in foreign currency, particularly dollar, and that a falling rupee versus the dollar has a positive impact on the sector, which is a net exporter.

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