Stronger rupee dampens pharma firms' profit

Year to date, the rupee has gained 2.1% and year on year, 4.3%, against the dollar

Domestic pharmaceutical companies, says Edelweiss Securities Research, will see profit erosion in the June quarter, due to pricing pressure and strengthening of the rupee against the dollar over the past year.

The latter development means Indian companies earn less in rupee terms for their foreign income, whereas a lot of their costs are denominated in rupees. Edelweiss estimates a seven per cent impact on profit due to this. Adding to the problems at an industry already grappling with structural business challenges, including customer consolidation and rising competition in the US, a major market. 

Year to date, the rupee has gained 2.1 per cent and year on year, 4.3 per cent, against the dollar. Deepak Malik of Edelweiss expects industry-wide profit to reduce by 26 per cent. The other factor impacting results this quarter will be the high base impact of the previous financial year. 

Lupin and Sun Pharma posted strong revenue growth since they had products under sale exclusivity.  Dr Reddy’s Laboratories (DRL), Lupin and Sun Pharma earn close to half their revenue from the US market. DRL has the highest foreign exposure among large-cap stocks and earns 85 per cent of its revenue from abroad;  the rest is from India.  While these companies have manufacturing facilities in the US, they ship most of the products from India.  Cipla, which earns 40 per cent of revenue from within India, would see the least impact from rupee appreciation; its US sales account for 18 per cent of revenue. 

On the positive side, firms will benefit from lower interest costs on their borrowings (Lupin, Glenmark and Cipla have dollar-denominated loans) and savings on import of Active Pharma Ingredients. 

Some think the currency volatility risks for firms would be marginal. “The currency impact on profitability would not be more than three or four per cent. We do not see this as a concern and many would have hedged themselves against currency volatility,” said Amey Chalke of HDFC Securities.