Re depreciation impact on pharma cos likely

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May result in higher interest burden on funds raised thru FCCBs

Deeptha Rajkumar
P.T.Jyothi Datta

Mumbai, Aug. 11

With a rupee that has depreciated by almost seven per cent from around Rs 43.59/60 to Rs 46.52/53 today and with over $1.5 billion in FCCB/ECBs, the Indian pharma companies face a challenge. The falling rupee imposes a higher burden on interest charges and repayment obligations.

"One of the biggest losses on rupee depreciation comes from increase in value of foreign currency loans, mainly FCCBs. And the current exchange volatility has raised concerns as to how deep could the impact on companies be," a pharma analyst said.

Among those companies perceived as likely to be impacted negatively on account of rupee depreciation are Ranbaxy, Sun Pharma, Cadilla, Wockhardt, GSK India, Matrix Labs, Lupin, Jubilant and Aurobindo.

However, some analysts are of the view that with the exception of Matrix Labs, the risk for most of the aforementioned companies is more notional than real.

"If the company with the FCCB issue has to repay its loan in cash then they will take a hit. However, if the debt is converted into equity, it would mean a no loss or no profit scenario," said an analyst with a foreign brokerage.

If the market share moves ahead of the conversion price, the company could expect investors to opt for and relieve them of a repayment obligation.

But the outlook on that happening does not seem bright at the moment.

Take, for instance, the Ranbaxy FCCB of $440 million, which has a conversion price of Rs 710 against current market price of Rs 394.05.

Exports to help

Another factor that mitigates risk to some extent is that most companies have exports that will profit from rupee depreciation. As such, the two are expected to offset each other. Additionally, the situation is status quo if the money raised is not utilised and kept as cash particularly overseas.

Analysts said in the instance of Matrix Labs the risk is more real given its huge dollar loan.

"But since approximately 50 per cent of its total exports are denominated in dollars, it should offset the risk," an analyst said.

"In the case of Ranbaxy, it has already utilised more than half the $440 million for its recent acquisitions. And the rest of the money can be converted at a later date, thus soft-punching the impact," points out an industry-analyst who tracks the company.

"Our FCCB funds are largely parked with banks overseas awaiting deployment in suitable acquisition target is as and when identified.

Hence the rupee-dollar volatility does not have any significant financial impact," a Sun Pharma spokesperson commented. Sun Pharma has an FCCB issue of $350 million.

On the rupee scenario, DSP Merrill Lynch in a recent note has forecast that the rupee should depreciate this quarter to levels slightly beyond its recent high of Rs 47/$.

"However, thereafter, based on expectations of rising oil prices, the currency is expected to strengthen (March 2007 rupee target is Rs 45/$)," they said.

(This article was published in the Business Line print edition dated August 12, 2006)
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