Lupin, Glenmark top picks in pharma space: PINC Research

PINC Research has come out with its report on pharma space. According to the research firm one can buy Lupin and Glenmark Pharma .

Rupee depreciates; Q2FY12 could be marred by MTM losses: With rupee depreciating by ~10% against the USD in last one quarter we analyse the impact of the same on the Pharma sector which derives nearly 50% of its revenue from the export segment.

The key highlights are as follows:

1. Rupee depreciation likely to have neutral impact on the OPM of the companies during Q2FY12 as rupee on an average has remained flat YoY against the USD.
2. There could be MTM losses during the quarter for companies having short term/working capital loans as rupee has depreciated by ~10% QoQ against the USD. Further, interest cost during the quarter could also see a sharp rise.
3. Most of the companies are likely to increase the quantum of hedges as on Sept 2011 in order to lock their export revenue at attractive rates

Sun Pharma, Cipla and Glenmark better placed: We expect Sun Pharma to be a major beneficiary of the rupee depreciation given the fact that the company derives nearly 50% of its revenues from the export segment and has lower quantum of hedges (35-37% of net exports over the next 12 months). As a result, it could increase its hedges during the quarter. Further the company has negligible exposure to foreign currency debt. Although Cipla has hedged only 25-30% of its net export revenues, it has foreign currency loan to the tune of USD50- 60mn. The company has partially hedged its short term loans and could probably report lower MTM losses. Glenmark, on the other hand, doesn’t have any forward covers which would be marginally positive on the OPM front given the fact that it derives 72% of its revenue from exports. Further, it has long term foreign currency debt to the tune of USD250mn so any MTM losses would be taken to balance-sheet. However, this quarter could witness a sharp rise in the interest cost.

DRL and Lupin to be partially benefited: DRL has covered 50-55% of its exports through debt and forward/option contracts. As a result the company could increase its hedges during the quarter. However, there could be MTM losses on foreign currency denominated short term borrowings during the quarter. On the other hand, Lupin has hedged its 65-70% of the export revenues through working capital debt and forward contracts. Subsequently, we expect interest cost to increase for the company.

Ranbaxy to have negative impact: Ranbaxy could be the worst impacted in our coverage universe due to rupee depreciation given the high level of hedges of USD750mn and foreign currency debt to the tune of USD400mn on
books.

Outlook and Valuation: We continue to maintain our Neutral stand on the sector given the rich valuations and the increasing competition in the high-margin domestic formulations business.

Our Buys: Lupin and Glenmark; Sells: Dr Reddy’s and Glaxo Pharma.

Institutional holding more than 40% in Indian cos

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