‘Company should try to free themselves from forex debt and should not hedged future revenues’

The Indian rupee has again pushed the domestic economy back by falling below 66.09 vis-a-vis the US dollar, and increased inflation is on the cards. At present, the Indian economy is reeling under pressure on the back of fears of flight of capital ahead of the Fed’s expected move of tapering off quantitative easing and negative domestic economic fundamentals; these altogether have been dragging the rupee lower. To sum up, when the rupee depreciates as against the dollar, it simply means that value of the Indian currency has gone down relatively against the greenback. There is a high level of pessimism about rupee and the government, along with the policy makers, should address the rising current account deficit (CAD) and slow growth with concrete measures until optimism finally settles in. The steep fall in rupee as against the dollar presents both risk and an opportunity to the India pharma sector, depending on their business model, foreign debt vis-a-vis earnings and hedging strategies. With a depreciating rupee, the value of exports naturally increases. Hence export-oriented companies post gains in forex earnings. Yes, the worst affected are the net importers, with high forex loans. No doubt, most of the Indian pharma are net exporters and stand to gain through higher export realisations enhanced by a depreciating rupee. However, losses on external commercial borrowings (ECBs) and limited possibility of adaptation on foreign currency convertible bonds (FCCBs) pose a concern to these companies, but the tread may not be huge.

To note, Indian pharma companies are mostly into manufacturing of generic drugs and offers drugs at a price much lower than the patent holder company. Moreover, rupee’s decline increases price competitiveness of Indian products in overseas markets, which may aid the volume led growth. On the contrary, many think that rupee’s weakness is a silver lining to the pharma sector as on the ground that it improves competitiveness and thereby exports, but one should not forget that price sensitivity of India’s export basket is very low and thus, rupee’s depreciation does very little in increasing exports.

However, the free fall in rupee is expected to severely impact those companies, who import raw material, have large foreign currency debt on their books and only partial hedging in place to upset the currency fluctuation. Also the companies with large forex hedges or foreign liabilities will see substantial immediate negative hit due to translation loss or mark-to-market (MTM) loss. Furthermore, the fallen rupee imposed a higher burden on interest charges and repayment obligations. Companies such as Ranbaxy, Cadilla, Wockhardt and Aurobindo import substantial inputs and have to sacrifice their margins. Ranbaxy is expected to take a substantial hit this year due to MTM loss on large outstanding forex hedge of $ 962 million. To note, the Indian pharma industry has slowed from over 17 per cent just two years ago to 10 per cent this year and trending even lower because of the price control regime. At present, the domestic currency has been sliding continuously and this fall is likely to impact those companies which are largely dependent on import. The impact of rupee depreciation will vary for companies, depending on their presence in markets outside India, product mix and currency hedging position. In order to deal with the rupee depreciation, the pharma companies should choose the appropriate hedging instrument. Moreover, the pharma company should try to free themselves from foreign exchange debt and should not hedged future revenues. For example: Sun Pharma, being a major exporter, is a big gainer on rupee depreciation as falling rupee adds to sales and margins. However, if rupee remains at current level, the loans to be repaid in next fiscal would cost higher and the companies such as Aurobindo, Glenmark and Dishman that have huge loan books, and are likely to get impacted most as they have to pay more.

– D K Aggarwal, Chairman and Managing Director, SMC Investments and Advisors