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The Fall of the Rupee and its Impact on Pharma
- Dr Saneesh Edacherian, Research Analyst, Business & Financial Services, Healthcare Frost & Sullivan

Frost & Sullivan deliberates on the impact of the depreciating rupee on the Indian Pharmaceutical Industry.

The Rupee which has already experienced a gradual fall since the beginning of 2013, spiraled out of control between June and August 2013, when it depreciated over 24 per cent from Rs 55 to Rs 68 per USD. High current account deficit of 4.9 per cent of GDP (highest after US and UK), policy paralysis, political uncertainty, and expected election year expenditures are the key reasons attributed to the fall of the Rupee. With Rupee expected to fall further, its impact on the Indian pharmaceutical industry is cut both ways.

The Report of the Working Group on Drugs and Pharmaceuticals Industry for the 12th five year plan has predicted the growth rate of the Indian pharmaceuticals industry to reach 18 per cent by 2016-2017. The domestic as well as international markets have been taken into account, each contributing a projected growth rate of 21 per cent and 16 per cent, respectively. The Indian pharmaceuticals industry is export oriented, with exports contributing nearly 50 per cent of revenues.

Exports by Indian pharma companies contribute a major chunk of the global generics market. In 2012, India alone contributed exports worth USD 15 billion to the global generics market and almost 40 per cent of exports were to the US alone.

Hence, Rupee depreciation against the Dollar will result in cash inflows for pharmaceutical companies that derive a significant part of their revenues from the US. However, the effect of increased US sales is not a cut from the same cloth; the gains are also dependent on the hedging policy of companies. Firms, which undertook forward contracts of hedging their sales revenues so as to insulate themselves from currency fluctuations, will not benefit much from Rupee depreciation.

Also, pharmaceutical firms that have hedged more than 40 per cent of their foreign currency transactions will not gain much due to the falling Rupee. Companies like Sun Pharma, CIPLA and Divi’s Labs realised quick gains compared to other companies because of their favorable hedging policy. Exports of Divi’s Labs alone contributed to more than 90 per cent of its revenue, which was mainly left unhedged. Dr Reddy's has hedged outstanding cash flows up to USD 480 million and Sun Pharma has hedged its exports against the Dollar for the next one year.

Profitability of companies is also affected by loans they owe in foreign currency. Higher Dollar conversion rate invariably results in higher interest and loan repayments. The additional debt burden adversely affects their profitability.

Aurobindo Pharma, Jubilant Life Sciences, Glenmark, Shasun, and Ranbaxy have a significant portion of their debt in foreign currency. So export gains will be partially offset by debt and interest payments. If these companies had not hedged their loans with fixed dollar rates they would have been liable to pay back their loans at a higher dollar conversion rate than the rates at which they acquired the loan.

Small and mid-cap companies, which primarily cater to the domestic market, are already hit by increasing inflation, capital expenditure, and raw material costs. The impact of New National Pharmaceutical Pricing policy will further reduce their profit margins. This policy has brought in around 348 drugs under the essential drugs category, and these include almost 40 per cent of the total drugs in the market.

The Indian pharmaceutical industry imports more than 75 per cent of raw materials for manufacturing purposes. India’s imports of Active Pharmaceutical Ingredients (API) and drug intermediates increased by 38 per cent from USD 2.9 billion in 2011, to USD 4.7 billion in 2012. Imports increased primarily to mitigate the risks of reduced margins due to the new pricing policy. However, rupee depreciation will increase the cost of imported raw materials. Though a major part of the import is from China, payments are made in Dollars, which increases the cash burden. Small and mid-cap companies will be more affected by the increasing cost of raw materials than the major players who have a higher export component in their revenue.

Over the years, leading participants of the Indian Pharmaceuticals industry have established a strong foothold in other fast growing economies such as South Africa, Russia, Brazil, Mexico, and Southeast Asian countries. Indian companies have not only profited from increasing revenue from these emerging markets but have also invested considerably in manufacturing facilities in these countries. Dr Reddy’s in Russia, Lupin in Japan and Torrent in Brazil are a few examples of companies that have a significant presence in other emerging economies.

Currency depreciation against the USD is not only a phenomenon in India but also in other emerging economies such as Brazil, Russia, Indonesia, South Africa, etc. As evident from Exhibit 2, spot exchange rates of currencies of emerging economies against USD have increased between August 2012 and August 2013. Repercussion of currency devaluation in other emerging economies is expected to reduce revenues from emerging economies.

Rupee depreciation will also compel importers to re-negotiate Dollar prices of products. To benefit from the rupee fall. The fall in the Rupee is also expected to impact foreign investments of major market participants. Increased spot exchange rates will escalate investment costs; hence, major mergers and acquisitions (M&A) deals might be deferred or even called - off. Cash outflows for the first half of 2013 decreased to USD 5.6 billion as compared to USD 13.0 billion in the first half of 2012.

Sun Pharmaceutical’s expected acquisition of Swedish Meda Pharmaceuticals in June was shelved. The key reason behind this decision was the increased cost incurred due to Rupee depreciation.

The impact of Rupee depreciation on Indian pharmaceuticals industry is not an open-and-shut case and it can be only assessed towards the end of second half of 2013, after the results are declared. In a nutshell, though Rupee depreciation increases revenue from exports, the gains will be neutralised by debt and interest payments, domestic market woes due to pricing policy, and reduced profits from emerging economies.