Weak Re may offset drug cos' export gains

While the current global liquidity crisis is unlikely to impact the performance of pharmaceutical companies, the rupee's depreciation will nullify any benefit the firms have realised from exports due to higher import costs for raw materials.

The trend in the near future will be better revenue performance, but less profits due to real or notional losses for those who have hedged in foreign exchange, forward covering and high interest rates on overseas borrowings.

Further, companies will have to put a temporary stop to unbridled expansion plans such as fancy acquisitions on the back of debt and save costs in the form of less travel, reduced manpower and revised packages for employees.

The expansion plans of companies, especially small to medium ones who source manufacturing contracts from global companies with brand new US regulatory standard plants (Rs 25-Rs 120 crore depending on products), may also stall due to paucity of funds, predict industry observers.

"The weaker rupee has led to both notional and real losses since the industry in general had not anticipated such a fall, leading to massive erosion in the bottom lines, thanks to mark-to-market principles as well as real losses on forex hedging and forward covering," noted Ajit Kamath, chairman and managing director of Arch Pharmalabs, an API global supplier, and a financial expert.

Already, leading companies such as Wockhardt, Piramal Healthcare and Cipla have posted losses for the current quarter due to forex losses of Rs 54 crore, Rs 41 crore and Rs 104 crore, respectively. This is despite an increase in net sales to the tune of 25 per cent, 17 per cent and 25 per cent, respectively for these companies.

Dr Reddy's Laboratories also posted a 52 per cent drop in net profit mainly due to forex losses of Rs 29.6 crore, despite a revenue growth of 30 per cent. According to a Motilal Oswal Securities report, leading Indian drug-maker Ranbaxy is also expected to incur MTM forex losses of Rs 80 crore because of outstanding foreign currency loans.

Pharmaceutical companies have adequate cash liquidity since most of them work on 30-45 days credit with suppliers and 15-20 days with clearing and forward (C&F) agents for their products, which help to maintain assured cash flow in the shorter term. Depreciation of the rupee by 15 per cent in the last six months caused imported raw materials to be dearer by at least 10-15 per cent, said sources.

"Input costs of drug companies are 20-25 per cent of the turnover and of this, a minimum of 25 per cent are imported raw materials such as vitamins and chemicals, mainly from China for most of the companies," noted Ranjit Kapadia, head of pharmaceutical research with Prabhudas Liladhar.

In India, the prices of 74 commonly used bulk drugs are regulated by the National Pharmaceutical Pricing Authority (NPPA) and the regulator has already revised the prices of some of the drugs in the recent past to help the industry continue production to avoid drugs going off the market.

"The coming quarters will be good for domestic pharmaceutical companies, but raw material imports are an issue. Anticipating this, we had stocked up some key raw materials, which can last up to nine months," said Ajay Piramal, chairman, Piramal Healthcare.

Sources said almost all the drug companies import 25-45 per cent of their required critical raw materials, mainly from China.

The prices of key raw materials (active pharmaceutical ingredients) have almost doubled in the past one year due to rupee's depreciation, temporary shutdown of units near Beijing during the Olympics and stringent action of Chinese drug regulator SFDA in the last two years to close down non-complaint good manufacturing practices (GMP) facilities.

"Companies such as Ranbaxy or Lupin or Dr Reddy's locally produces most of their required APIs and import only some excipeints and other ingredients. The rupee depreciation is unlikely to impact these companies much, but those who have borrowed heavily for expansion through ECBs and FCCBs will suffer heavily," noted Sujay Shetty, associate director, PricewaterhouseCoopers.

However, the falling rupee has come as a blessing for top companies such as Ranbaxy, Dr Reddy's, Cipla, Lupin, Sun Pharma, which export more than 50 per cent of their production to various countries. These firms could gain from the depreciated rupee on foreign exchanges and can compensate for lesser margins and realisation pressures due to intense competition in geographies such as the US.

However, considering the raw material import issue and forex transaction losses, the gains could be minimal, said sources.