Express Pharma

The good, the bad and the ugly in Indian pharma


Chirag Talati, Analyst, Kotak Institutional Equities (KIE), gives an insight on the recent global currency movements and the risks they pose to Indian pharma. Excerpts from the report

Recent global and currency movements have exposed the risks to Indian pharma’s ex-US growth profile and with a $2.2 billion revenue exposure to cross currencies, sharp movements as seen for rouble will hurt growth and margins. While Russia/ CIS and Venezuela are set to have a material impact on a few companies, notably Dr Reddy’s Laboratories Ltd (DRRD), the Indian Rupee (INR) depreciation versus the United States dollar (USD) should help absorb some of this impact partially. Net impact is a -5 to +2 per cent change in EPS estimates with DRRD being the most impacted.

The good — rupee depreciation versus dollar to benefit the sector

According to KIE economists, INR should see steady depreciation, albeit to a much lesser degree than other emerging markets. KIE economists forecast the USD/INR to average ~63 in FY2016 compared to 61 in FY2015 and 65 over the longer term. Ceteris paribus, increasing exposure to the US will provide a strong cushion to Indian pharma ($9 billion+ revenue exposure for the sector), with our analysis suggesting the highest sensitivity for Sun Pharmaceutical Industries Ltd (SUNP), which should see margin benefit of 50 bps and EPS upgrade of 160 bps for every one per cent rupee depreciation. This is followed by LPC (30 bps margin/ 120 bps EPS), DRRD (18 bps margin/90 bps EPS) and Cipla (5 bps margin/23 bps EPS).

The bad — negative impact from cross-currency moves for Japan, Brazil, SA

The euro (EUR), South African rand (ZAR), Brazil real (BRL), Japanese yen (JPY) and Australian dollar (AUD) depreciated by five per cent, four per cent, 11 per cent, 10 per cent and seven per cent against the dollar compared to the September 2014 quarter with the cross-currency impact highest for ZAR, BRL and JPY. Indian phar