The Hindu Business Line : Drug cos rethink strategies to offset rupee impact

Cautious approach
Cipla would look for any scope to tighten its belt and better internal cost efficiencies.
Ranbaxy would actively monitor developments and take appropriate risk management measures

P.T. Jyothi Datta

Mumbai, Sept. 25 Bitten by the strong rupee, domestic drug companies with an accent on exports are being twice shy. They are looking at including an “escalation clause” in future deals, reviewing current cost efficiencies and even putting immediate investment plans on hold to cope with an appreciating rupee eating into annual profits.

Profit fall

A dip in annual profits, projected between 8 to 12 per cent, looms over the financial performance of domestic drug companies, say a cross-section of industry representatives.

With exports of Rs 2,000 crore, about half its total turnover, the Cipla Chief Executive Officer, Mr Amar Lulla, told Business Line that the company would look for any scope to tighten its belt and better internal cost efficiencies. Changes cannot be made overnight, he said, indicating that it will take a while for companies to recover from the impact of a strong rupee.

Cipla will take a macro look at products and investments for the future and put on hold plans that may have been undertaken in cash-surplus scenario, he said.

Mr Ranjit Kapadia, Research-head, PCG-Prabhudas Lilladher, points out that companies will look to include an “escalation clause” in their deals, where they will absorb a percentage of the fluctuation in the rupee/dollar rate. But if the exchange rate fluctuates more than the negotiated cut-off point, say if it swings less or more than three per cent, the two companies will proceed along the lines formalised when the deal was struck.

Rupee impact

Drug companies of all hues — from Cipla, Ranbaxy, Dr Reddy’s, Sun Pharma to J.B.Chemicals, Unichem, Ipca etc — will feel the heat of the strong rupee, industry representatives observe.

In fact, the Pharmaceuticals Export Promotion Council (Pharmexcil) has written two letters in the recent past to the Commerce Ministry, seeking a relief package for export-oriented drug companies, as well.

Exports account for about 21 per cent of Sun Pharma’s consolidated turnover, the company spokesperson said, admitting that an impact would be felt, though not as much as some of the other export-driven companies.

Ranbaxy would actively monitor developments and take appropriate risk management measures to mitigate the impact of a rising rupee, the company said, without outlining details. Around 80 per cent of its revenues comes from its overseas business.

Admitting that currency appreciation would have an impact, Dr Reddy’s Laboratories said the company has a natural hedge built into its operations and currency diversification in certain geographies (such as Europe, Russia & CIS) minimises the dependency on the dollar.

But, the intermediary industry largely transacts in dollars irrespective of the geography and so diversification to a different currency cannot happen immediately.

“Companies cannot not afford to be super-productive”, says Mr Sujay Shetty, PricewaterhouseCoopers’ Head of Pharma and Lifesciences. Drug companies with a large export component will be reviewing products, looking at money-management, human resources and tightening of areas that have not been productive in the past, he said.

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