Near-term prospects hurt: Emerging markets (RoW ex-India) constitute 18% of the overall business for our coverage universe of stocks. The recent depreciation of emerging market currencies (particularly in Russia, Brazil) poses risk to near-term profitability, especially since the swing has been huge. We have assessed the impact of local currency depreciation (vs INR) for key geographies–Russia/CIS and LatAm–on Indian pharmaceuticals companies in our coverage. Cumulatively, these two geographies account for 40% of the total RoW (rest of the world) sales (7-8% of total sales) for our coverage universe.
Potential Ebitda cuts of 1-5%, should currencies depreciate further: If the current exchange rates persist (RUB:INR=1, BRL:INR=23.5), FY16e Ebitda could be cut by 1-5% for the companies impacted. The impact would be the highest on DRRD and GNP, given their high exposure to Russia/CIS and LatAm (16% of total sales).
Russia/CIS accounts for roughly 10% of the overall sales of the top five coverage companies in this region. Political crisis (Ukraine-Russia) coupled with the weakness in crude prices has resulted in a sharp depreciation of the local currency vs USD (83% since March 2014). Continued weakness in the local currency (vs USD) would hurt revenue growth and profitability, especially if INR remains stable (vs USD).
We have analysed five major companies with a major presence in Russia, namely DRRD, GNP, RBXY (Ranbaxy), Ipca and TRP (Torrent Pharma). If the exchange rates sustain at current levels (RUB:INR=1 vs 1.5 assumed), the impact on overall Ebitda (FY16e) could be 4% for these companies. In this geography, DRRD and GNP will be hit the most. The impact on TRP and Ipca would be nominal owing to lower sales contribution. DRRD’s FY16e sales/Ebitda could be lowered by 3/5% while GNP’s by 2/3%. We believe RBXY’s operations do not reflect its true profitability in these geographies.
LatAm: TRP and GNP have meaningful exposure: LatAm accounts for 3-4% of overall sales for our coverage universe. Select companies like GNP and TRP have significant revenue exposure to this geography (6-13%). Continued pressure on growth and high dependence on crude oil prices could weigh on LatAm currencies in the near future. BRL (Brazilian lira) has under-performed INR by 12% since March 2014 .
Venezuela: Sudden currency depreciation has resulted in depletion of USD reserves with the local players, who could not import enough raw materials to meet demand. GNP and DRRD benefitted from the resultant drug shortage in Q2FY15 and this situation is likely to persist in the near term (four-six quarters).
By Motilal Oswal