RBI's rupee move won't impact pharma companies, say experts

Chirag Talati, pharma analyst, Espirito Santo Securities tells CNBC-TV18 that the Reserve Bank of India’s (RBI) move to boost the Indian currency by asking exporters to convert 50% of their foreign exchange holdings into rupees will not have a significant impact on pharmaceutical companies.

After speaking to a few banks and companies, he says, “Not many companies hold a significant amount of their dollar exposure in Exchange Earners' Foreign Currency Account (EEFC) account.”
Sarabjit Kour Nangra, pharma analyst, Angel Broking too agrees with him saying she doesn’t see this move impacting them in terms of their numbers going forward. Below is an edited transcript of their interview on CNBC-TV18. Watch the accompanying video for more. Q: With regards to the administrative measures that were announced by the RBI today, there was some amount of speculation that there could be an impact on pharmaceutical companies. Have you done some research with regards to this and whether there is any impact? Talati: We don’t think this is likely to have a significant impact on pharmaceutical companies. Firstly, our understanding from speaking to banks and companies is that not many companies hold a significant amount of their dollar exposure in EEFC account.
Secondly, most of the companies have a practice of hedging their net exposure already. So whatever they have is kind of the amount of exposure that they have is already very low. So we don’t see this measure having a significant impact on pharmaceutical companies.
One company that has been mentioned on and off is Ranbaxy wherein the company has an outstanding liability that could crop up in the next four-five months regarding the Department of Justice (DoJ) penalty. But we don’t know as to what will be the treatment of this and whether the RBI will give them some benefit in terms of allowing them to keep their exposure in dollars. It is kind of being very speculative at the moment if you think about numbers but our sense is that it won’t really have a significant impact on pharmaceutical companies. Q: Why would you expect the RBI to give a special treatment for Ranbaxy? Do you have confirmed news that they have a lot of money in EEFC accounts? Talati: What we are saying is that if you look at the company, company currently has a lot of receivables that it will receive in terms of the Lipitor (atorvastatin) in the US. If the company has a genuine liability payment that is coming up over the next six months and if the RBI is forcing the company to convert it into rupees and convert it back into dollar at the time of liability payment that would be very unjust. We are not sure as to what is going to happen but this is clearly a case wherein there is no speculation happening. We are not sure how it will turn out but we don’t think that RBI will penalise the company for its genuine liability. Q: Would you agree that most companies will not be impacted? What have you picked up from the pharmaceutical companies you spoke to? Nangra: I have not worked out in a detailed manner but as Talati said, I also agree over there that I don’t think pharmaceutical companies would be impacted very significantly. I don’t think it will have an impact them in terms of their numbers going forward. Q: What do you think is plaguing Ranbaxy today, is it the earnings, is it just general profit booking post that purpose and run that we saw yesterday, is it speculation on possibly impact of these RBI measures? Talati: I think it would be a combination of both but I think it relates more to the profit booking that we are seeing on back of earnings yesterday. Q: What have you made of the earnings? Have you upped your target price since? What kind of earnings growth are you forecasting for Ranbaxy? Talati: We have not upped our target price at the moment for Ranbaxy. Clearly, the earnings beat market expectations by a wide way. However, if you look at the margin expansion which was where the market was caught by surprise, after having analysed it, we don’t think it is too exciting because if you strip out the Lipitor contribution in the US and there is another element which was atorvastatin sales in Australia and Western Europe, which contributed close to an estimated USD 8 million on gross profit line.
So if you remove that from numbers, it seems that EBITDA margins coming at less than 9% and if you combine it with the fact that the emerging market growth which is 60% of its base business still languishes at close to 7-8%, there is little case for the operating leverage to play out over the next year. So we kind of remain balanced about the company. We have a neutral rating on the stock. Q: What is your preview with regards to the numbers that are coming out today? There is Cipla, Lupin, Cadila and then tomorrow it is followed up by Dr Reddy’s? Nangra: We are expecting the pharmaceutical sector to deliver good set of numbers for the quarter both on the topline as well as on the bottomline. If you have to look at the largecap numbers which are coming in today and tomorrow, we are expecting a robust set of numbers on the topline, barring Cipla where the topline growth would be muted whereas we are expecting a margin expansion happening across companies and a healthy net profit growth coming in through.
In case of midcaps and smallcaps, there could be a divergent trend depending upon the company specific case-to-case but otherwise overall if you have to look at the largecap pharmaceuticals, they will deliver a healthy set of numbers for the quarter.