Moneycontrol Bureau
Pharma stocks bounced back on Monday after last Friday's sell-off due to UK's exit from the European Union. However, the BSE Pharma index's loss in previous session was minimal, down only 0.4 percent compared to other sectors that fell 1-4 percent.
The reason is that these pharma companies have very limited exposure to European Union while their exposure to US is quite high, more than 50 percent.
Hence, brokerage houses do not see any major impact of Brexit on pharma companies' earnings. In fact they have not changed their views post Friday's event, saying companies may get impacted only by currency volatility globally. According to them, any EU impact will be offset by US large exposure to the US.
"All companies under our coverage have minimal exposure to the UK directly. However, indirect impact due to relative movement of currencies, particularly the USD/INR, is likely to have some impact on the earnings per share (EPS) of coverage firms," says Bank of America Merrill Lynch (BoAML)
The brokerage house further says though some companies do generate considerable revenues from the European Union (EU) region, it believes that net impact for most companies is likely to be minimal.
As per its research note, Aurobindo Pharma has direct exposure to the UK is only around 1.5 percent. Hence, the net impact of movement in EUR/INR on company's estimates is negligible, the brokerage feels.
About 11 percent of Dr Reddy's sales are exposed to the EU region, with formulations accounting for around 5 percent. Glenmark has 9.5 percent exposure to the EU region, of which around 2.5 percent comes from the UK; hence net open exposure is estimated at 5-6 percent, says BoAML.
Cipla's 4.5 percent sales are exposed to EU (with UK accounting for less than 1 percent), Sun Pharma 4 percent, Cadila Healthcare 3 percent and Lupin only 3 percent.
According to Macquarie, Brexit might possibly lead to depreciation of GBP and Euro against the USD, which could hurt companies having high EU exposure. However, any depreciation of rupee against USD could act as a hedge for Indian Pharma companies, it says.
The brokerage views the recent approval for 74 percent FDI (foreign direct investment) under the automatic route as a positive for the sector long-term. FDI approval brings much-needed clarity for any foreign entity looking to invest in India and much-needed consolidation in the pharma space.
It feels Indian companies with large exposure to emerging markets and a growing presence in the Western generic markets could be an ideal fit as an acquisition target.
Macquarie sticks to Sun Pharma as its top pick. It feels with strong execution, balance-sheet, free cash flow generation and a niche pipeline, the company should revert to a premium valuation.
Citi is positive on companies with a robust US pipeline and clean compliance status. Aurobindo remains its top pick followed by Lupin and Sun Pharma, says the brokerage house.
| Company Name | Last Price | % Change | EU Exposure to FY16 sales |
| Macquarie report | |||
| Aurobindo Pharm | 719.05 | 2.59 | 23% |
| Cadila Health | 315.6 | 1.09 | 3% |
| Cipla | 477.45 | 0.19 | >5% |
| Dr Reddys Labs | 3180.6 | 0.87 | 10% |
| Glenmark | 772.3 | 0.9 | 9% |
| Lupin | 1473.05 | 0.69 | 3% |
| Sun Pharma | 757.8 | 0.4 | >5% |
| Wockhardt | 891.25 | 0.26 | 30% |
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