Like IT companies, almost 60-80 per cent of the revenues of pharma companies come from exports and a large part of the value addition happens in India. So, a weak rupee would typically benefit the sector. However, Deutsche Bank believes the gains could be limited due to three factors.
First, at least 70 per cent of raw material and 20 per cent of labour cost is generally linked to the dollar. Second, is the price competition among Tier-II pharma companies. And third is the depreciation in other emerging market currencies against the dollar.
Many companies in this sector have foreign currency loans. Analysts believe many firms tend to hedge their net exposure over varying timeframes. Thus, the positive impact of a weak currency could be partial offset by hedges, as well as potential mark-to-market losses on forex liabilities. Espirito Santo says, "Ranbaxy has the biggest sensitivity to forex fluctuations. The INR depreciation is likely to be negative for Dr Reddy's due to high amount of cash flow hedges, while Cadila, Cipla and Lupin could see a neutral to marginal benefit to their FY13 EPS."