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Pharmaceuticals
India
Rupee at 50: Few to benefit. The INR overall has depreciated close to 12% vis-à-vis
the USD from its recent lows of 44.07. Due to pharma companies being net exporters,
the overall perception is that they stand to benefit handsomely. However, we note that
gains will be subdued for certain companies due to (1) high forex debt taken to enjoy
lower interest rates, which is largely unhedged, (2) import of raw materials and
(3) hedges on net exposure. Impact on our universe: (1) We expect those with negligible
forex debt and minimal hedges such as SUN, Divis to benefit the most; (2) Ranbaxy and
Jubilant have high forex debt making them most likely to report large translational
losses and higher interest costs and (3) DRL, Cadila are hedged to the tune of 60/50%
of their net exposure, implying subdued operational gains.
INR could see further depreciation bias according to our Economy team
The INR has depreciated close to 12% from its recent lows of 44.07 to the USD. Our economics
research team believes there is a risk of INR/USD breaching the 50 mark in the near term, however,
from a medium-term perspective, the team expects to see the Rupee to settle at 46-49 unless
there is an absolute meltdown in global markets.
Ranbaxy and Jubilant likely to report substantial translational losses
The low overall cost of borrowings for Ranbaxy and Jubilant suggest that they have low financial
hedges for their overseas borrowings and are relying on (1) natural business hedges (revenues in
US$) or (2) stable exchange rates. Since the latter no longer holds now, we expect both to report
large translational losses on loans and higher interest cost. Their predicament will be further
exacerbated due to (1) multi-year hedges taken by Ranbaxy (US$700-750 mn outstanding as of
June 2011) which means Ranbaxy will lose through (a) MTM losses on the outstanding derivatives
position (reported below PAT) and (b) realized losses as and when these hedges are realized,
reported in other operating income, although on unhedged position it will gain operationally and
(2) although Jubilant has not hedged itself as its debt provides a natural hedge, we expect net
exports which will benefit from recent volatility to be lower than its outstanding forex debt of
US$600 mn. We estimate its FY2012E exports at around US$600 mn (70% of total sales),
however, net of imports, we believe the number will be lower. Glenmark has recently converted a
majority of its debt (Rs16.5 bn outstanding currently) to foreign debt to lower its interest cost.
However, it expects its operational gains on net exports to be nullified by higher interest costs,
while translational losses/gains on foreign debt will be routed through balance sheet as per IFRS
requirements
SUN, Divis have negligible debt and minimal hedges and therefore stand to benefit the most
We expect companies with low debt and minimal hedges such as SUN, Divis to benefit
handsomely. We also expect companies such as Biocon and Cipla who have minimal debt and
hedges to benefit as their hedges allow them to benefit from recent weakness— (1) Biocon has
taken hedges for next two years in the range of Rs47-52; if the Rupee crosses Rs52, they will not
benefit. Biocon pays a premium for these hedges, which is reported in its interest cost. Biocon
follows this strategy as it suffered large MTM losses of Rs1.5 bn on its earlier derivatives position in
FY2009. (2) Cipla’s hedges are small as it covers net exports on a month-to-month basis. As of
June 2011, its outstanding hedges were US$190 mn, equivalent to three months of exports only.
DRL, Cadila hedged—subdued operational gains
Both DRL and Cadila have forex debt accounting for as majority of their total debt.
Therefore, they hedge their net exposure. DRL and Cadila are hedged to the tune of 60%
and 50% of their net exposure at rates varying between 45-47 and 47-48, respectively
therefore liming their operational gains in the near term.
Hedging policies of pharma companies
Debt Forign currency debt Hedges Net impact Hedging policy
(Rs mn) (%)
Low foreign debt and minimal hedges
SUN Negligible debt Minimal Positive
As a policy, a portion of SUN's net exports is hedged for 6
months -1 year. SUN expects to benefit positively from recent
slide in rupee
Divis Negligible debt No Positive
Low foreign debt and hedges
Biocon 2,578 75% is US$ debt Yes Positive (till Rs52)
Will gain positively till Rs52. 100% of net exports is hedged for
this year and 70% of net exposure is hedged for next year at
rates varying between 47-52. Between 47-52, hedges are
realised at prevailing rates. These hedges are expensive and
hedging cost is reported in interest cost
Cipla 4,500
Majority is forex debt
and is hedged Yes Positive
As of June, 2011 the outstanding amount of forward contracts is
about US$ 190 mn.The company continues to follow the practice
of covering net export billing on a month to month basis
Foreign debt and no hedges
Glenmark 16,500 65% is US$ debt No Status quo
Gain on net exports will be nullified through higher interest cost
(although spreads have been locked in), and translational losses
on forex debt will be routed through balance sheet
Jubilant 33,640 80% of total debt No Negative
Likely to report translational losses and gains on loans which will
be reported in exceptional item. Also interest cost is likely to go
up. Our net exports for FY2012E is lower than forex debt
Foreign debt and hedges
Ranbaxy 28,350 67% of total debt
US$750
mn
derivativ
es
outstand
ing Negative
Ranbaxy reports forex items in 3 lines- (1) It will report forex gain
in other operating income (2) will report losses on loans line due
to translational losses and also likely to show higher interest cost
(3) will lose through translational losses on derivatives position
(US$700-750 mn open) and (4) realised losses on derivatives
unwound depending on the currency rate on date at which
derivative position is unwound. These hedges are at lower than
Rs46
Dr Reddys 23,940 70% is US$ debt Yes
Will gain on only
40% of net exposure
DRL has hedged its net exposure (net of debt) to the extent of
60% at rates between 45-47 which means it will benefit only to
the extent of 40% of its net exposure. Below EBITDA line, other
income will include forex losses or gain based on MTM position
of outstanding current liabilities and assets
Cadila 10,973 50-60% is US$ debt Yes
Will gain on only
50% of net exposure
Cadila has hedged its net exposure (net of debt) to the extent of
50% at rates between 47-48 which means it will benefit only to
the extent of 50% of its net exposure. Cadila reports forex gains
on operational account in other income and forex loss in other
expenses while translational losses on loans are reported in
interest cost. We also expect interest cost to increase as 50-
60% of its debt is US$ debt
Source: Kotak Institutional Equities estimates, Company
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pharmaceuticals
India
Rupee at 50: Few to benefit. The INR overall has depreciated close to 12% vis-à-vis
the USD from its recent lows of 44.07. Due to pharma companies being net exporters,
the overall perception is that they stand to benefit handsomely. However, we note that
gains will be subdued for certain companies due to (1) high forex debt taken to enjoy
lower interest rates, which is largely unhedged, (2) import of raw materials and
(3) hedges on net exposure. Impact on our universe: (1) We expect those with negligible
forex debt and minimal hedges such as SUN, Divis to benefit the most; (2) Ranbaxy and
Jubilant have high forex debt making them most likely to report large translational
losses and higher interest costs and (3) DRL, Cadila are hedged to the tune of 60/50%
of their net exposure, implying subdued operational gains.
INR could see further depreciation bias according to our Economy team
The INR has depreciated close to 12% from its recent lows of 44.07 to the USD. Our economics
research team believes there is a risk of INR/USD breaching the 50 mark in the near term, however,
from a medium-term perspective, the team expects to see the Rupee to settle at 46-49 unless
there is an absolute meltdown in global markets.
Ranbaxy and Jubilant likely to report substantial translational losses
The low overall cost of borrowings for Ranbaxy and Jubilant suggest that they have low financial
hedges for their overseas borrowings and are relying on (1) natural business hedges (revenues in
US$) or (2) stable exchange rates. Since the latter no longer holds now, we expect both to report
large translational losses on loans and higher interest cost. Their predicament will be further
exacerbated due to (1) multi-year hedges taken by Ranbaxy (US$700-750 mn outstanding as of
June 2011) which means Ranbaxy will lose through (a) MTM losses on the outstanding derivatives
position (reported below PAT) and (b) realized losses as and when these hedges are realized,
reported in other operating income, although on unhedged position it will gain operationally and
(2) although Jubilant has not hedged itself as its debt provides a natural hedge, we expect net
exports which will benefit from recent volatility to be lower than its outstanding forex debt of
US$600 mn. We estimate its FY2012E exports at around US$600 mn (70% of total sales),
however, net of imports, we believe the number will be lower. Glenmark has recently converted a
majority of its debt (Rs16.5 bn outstanding currently) to foreign debt to lower its interest cost.
However, it expects its operational gains on net exports to be nullified by higher interest costs,
while translational losses/gains on foreign debt will be routed through balance sheet as per IFRS
requirements
SUN, Divis have negligible debt and minimal hedges and therefore stand to benefit the most
We expect companies with low debt and minimal hedges such as SUN, Divis to benefit
handsomely. We also expect companies such as Biocon and Cipla who have minimal debt and
hedges to benefit as their hedges allow them to benefit from recent weakness— (1) Biocon has
taken hedges for next two years in the range of Rs47-52; if the Rupee crosses Rs52, they will not
benefit. Biocon pays a premium for these hedges, which is reported in its interest cost. Biocon
follows this strategy as it suffered large MTM losses of Rs1.5 bn on its earlier derivatives position in
FY2009. (2) Cipla’s hedges are small as it covers net exports on a month-to-month basis. As of
June 2011, its outstanding hedges were US$190 mn, equivalent to three months of exports only.
DRL, Cadila hedged—subdued operational gains
Both DRL and Cadila have forex debt accounting for as majority of their total debt.
Therefore, they hedge their net exposure. DRL and Cadila are hedged to the tune of 60%
and 50% of their net exposure at rates varying between 45-47 and 47-48, respectively
therefore liming their operational gains in the near term.
Hedging policies of pharma companies
Debt Forign currency debt Hedges Net impact Hedging policy
(Rs mn) (%)
Low foreign debt and minimal hedges
SUN Negligible debt Minimal Positive
As a policy, a portion of SUN's net exports is hedged for 6
months -1 year. SUN expects to benefit positively from recent
slide in rupee
Divis Negligible debt No Positive
Low foreign debt and hedges
Biocon 2,578 75% is US$ debt Yes Positive (till Rs52)
Will gain positively till Rs52. 100% of net exports is hedged for
this year and 70% of net exposure is hedged for next year at
rates varying between 47-52. Between 47-52, hedges are
realised at prevailing rates. These hedges are expensive and
hedging cost is reported in interest cost
Cipla 4,500
Majority is forex debt
and is hedged Yes Positive
As of June, 2011 the outstanding amount of forward contracts is
about US$ 190 mn.The company continues to follow the practice
of covering net export billing on a month to month basis
Foreign debt and no hedges
Glenmark 16,500 65% is US$ debt No Status quo
Gain on net exports will be nullified through higher interest cost
(although spreads have been locked in), and translational losses
on forex debt will be routed through balance sheet
Jubilant 33,640 80% of total debt No Negative
Likely to report translational losses and gains on loans which will
be reported in exceptional item. Also interest cost is likely to go
up. Our net exports for FY2012E is lower than forex debt
Foreign debt and hedges
Ranbaxy 28,350 67% of total debt
US$750
mn
derivativ
es
outstand
ing Negative
Ranbaxy reports forex items in 3 lines- (1) It will report forex gain
in other operating income (2) will report losses on loans line due
to translational losses and also likely to show higher interest cost
(3) will lose through translational losses on derivatives position
(US$700-750 mn open) and (4) realised losses on derivatives
unwound depending on the currency rate on date at which
derivative position is unwound. These hedges are at lower than
Rs46
Dr Reddys 23,940 70% is US$ debt Yes
Will gain on only
40% of net exposure
DRL has hedged its net exposure (net of debt) to the extent of
60% at rates between 45-47 which means it will benefit only to
the extent of 40% of its net exposure. Below EBITDA line, other
income will include forex losses or gain based on MTM position
of outstanding current liabilities and assets
Cadila 10,973 50-60% is US$ debt Yes
Will gain on only
50% of net exposure
Cadila has hedged its net exposure (net of debt) to the extent of
50% at rates between 47-48 which means it will benefit only to
the extent of 50% of its net exposure. Cadila reports forex gains
on operational account in other income and forex loss in other
expenses while translational losses on loans are reported in
interest cost. We also expect interest cost to increase as 50-
60% of its debt is US$ debt
Source: Kotak Institutional Equities estimates, Company
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