Unhedged rupee bets weigh on firms

Rupee rising against dollar and some other currencies has been a pain point for exports

A four per cent year-on-year appreciation of rupee against the dollar is the latest cause of concern for domestic pharmaceutical companies, which are already battling regulatory challenges as well as drug price erosion in the US and pricing control in India. In fact, their worries could multiply if estimates of further gains in the rupee come true.

Companies including Aurobindo Pharma, Lupin, Sun Pharmaceutical Industries and Dr Reddy's Laboratories earn 40-50 per cent of their revenue from the US, the largest health-care market globally, and are now taking the heat due to stronger rupee.

While on a year-on-year basis rupee is about four per cent higher, it has gained 5.9 per cent against the dollar on a year-to-date basis. Two weeks ago, rupee reached a two-year high against the dollar. On a full-year basis, only euro, Russian rouble and Thai baht have risen more sharply than the rupee against the dollar.

On Wednesday, rupee closed at 64.2 against the dollar.

Rupee appreciation means the companies earn less in rupee terms for their foreign income whereas a lot of their costs are denominated in rupees. Companies usually hedge their foreign currency receivables and loans, but this time around many of them had not completely de-risked themselves.

"In line with our policy of covering part of our exposures over an 18-month period, we did cover part of our open positions for the year, but unfortunately for us, a large portion remained unhedged and, consequent to that, we did suffer erosion in topline revenues and margins to the extent of about Rs 50-60 crore," Lupin chief financial officer Ramesh Swaminathan said.

Lupin's net profit dipped 59 per cent on a year-on-year basis to Rs358 crore in June 2017 quarter (Q1FY18). Other key factors contributing to profit decline were pricing pressure in US and muted domestic sales due to goods-and-services-tax-related destocking, among others.

Read more: This is Part-1 in the 'Rupee Impact' series. Read Part-2, Part-3, and Part-4

A Torrent Pharma spokesperson said that the export revenue growth for the June quarter was impacted by around three per cent owing to rupee strengthening against the dollar. The spokesperson said the company follows a consistent policy of hedging revenue for the next 12 months, but declined to give a guidance for upcoming months. Torrent's US sales slipped 37 per cent, while its German and Brazilian businesses grew by eight per cent in the first quarter over the year-ago period.

At the start of the financial year, Glenmark had guided for 12-15 per cent constant-currency revenue growth. But, with rupee rising against the dollar, the drug maker's actual revenue growth could end up in the range of 8-10 per cent.

Glenmark managing director Glenn Saldanha said the company has not lowered its guidance. "We still maintain our guidance. We have always said that our guidance will be on a constant-currency basis."

Lupin's Swaminathan  believes that the rupee's strong gains versus the dollar might not last long. "A combination of macroeconomic conditions, capital flows into the country, weak oil prices and the US government policies have helped in strengthening of the rupee. But, there are indications that these might not last for long and we could see rupee depreciation after some time. But, until then, exporters would continue to lose and would do well to cover some part of their exposures," he says.

Compiled by BS Research Bureau
Source: Ministry of commerce

Although exports to North America account for almost 35 per cent of India's pharma exports and hence the dollar-rupee value is a key influencing factor for many companies, movement in the euro, Russia's rouble, etc, also have a bearing on their export revenue. 

For instance, the strengthening of Russian rouble has brought some respite to pharmaceutical companies in India. Russia is among the top export markets for Indian companies and Dr Reddy's Laboratories and Glenmark reported growth in their Russia sales in Q1FY18. "However, in markets like Brazil, the trend has been mixed and the Brazilian real depreciated last quarter, which will impact pharmaceutical exports," said an expert.

Bloomberg Intelligence (BI) Economics estimates rupee will continue to appreciate against the dollar in FY18. BI Economics' econometric model forecasts the rupee will appreciate to 61.1 against the dollar in March 2018 from 67 in March 2017. It is now at around 64.2 to a dollar. 

India also imports a good chunk of its raw materials from China, and hence, the Chinese renminbi value also matters.

"Around 70 per cent of active pharmaceutical ingredients (or APIs) used by pharmaceutical companies in India are imported and these will become cheaper. To an extent, companies have a natural hedge and the currency impact will be felt in difference between foreign currency earning and expenses," said Hitesh Sharma, partner and national leader, life sciences, EY. He adds that companies need to have robust currency-fluctuation hedging process and a strong risk management practice. "But, if the rupee appreciates a lot, then companies will have to seriously look at supply chains and manufacturing processes to gain efficiency and protect margins, especially if competitive forces have a challenge on what price escalations can be made," says Sharma. 

A four-part series looks at how a strong rupee is hurting some of India’s top exporting sectors.

Tomorrow: Information technology services