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Mark-to-market loss may hurt profit growth

Source : BUSINESS_STANDARD
Last Updated: Fri, Jul 13, 2012 19:05 hrs

First quarter results of the pharmaceutical sector are expected to be a mixed bag. A weak rupee will shore up earnings at the operating level, while profit growth is likely to get affected due to foreign exchange (forex) losses.

Sales growth will have major contributions from higher conversion value of dollar revenues, new launches in the US and expansion in semi-regulated markets. According to CLSA Research, exports comprise 50-80 per cent of revenues of Indian pharma companies, with most invoices dollar denominated. The rupee has depreciated nine per cent against the dollar in April-June over the previous quarter, while the depreciation is sharper against euro, yen and real on a year-on-year basis. One percent depreciation in the rupee results in 1.2 per cent upgrade in operating earnings, assuming 50 per cent export revenue.

The weak rupee will benefit companies such as Cipla Ltd, Divi’s Laboratories Ltd, Dr Reddy’s Laboratories Ltd, Lupin Ltd and Sun Pharmaceutical Industries Ltd. However, forex losses will hit earnings growth of Aurobindo Pharma Ltd, Cadila Healthcare Ltd, Glenmark Pharmaceuticals Ltd, Jubilant Life Sciences Ltd and Ranbaxy Laboratories Ltd.

Since domestic formulations growth for April-May had been strong, growth rates in multi-national companies will also improve. Cipla, GlaxoSmithKline Ltd, IPCA Laboratories Ltd and Torrent Pharmaceuticals Ltd will show pick-up in domestic growth.

Companies’ large forex hedges, or foreign liabilities, will see a substantial hit due to mark-to-market (MTM) losses. According to CLSA Research, most companies run hedges to cover two-six quarters of export receivables and will see MTM losses. Mark-to-market losses can occur when financial instruments held are valued at the current market value.

Translation losses on foreign currency convertible bonds/ external commercial borrowings for Aurobindo Pharma, Glenmark Pharma, Jubilant Life, Orchid Chemicals and Pharmaceuticals Ltd and Strides Arcolab Ltd will have significant one-time negative impact.

Translation losses, which arise from currency fluctuations, have increased as the rupee fell sharply against the US dollar this year.

Ranbaxy, for example, will have a positive impact from the residual exclusivity of Lipitor sales, and hence, the company may post a 40 per cent rise in net sales. The profit, however, will be hit by MTM losses on large outstanding forex hedge. The company’s net loss, including MTM loss, according to analysts, may vary between Rs 80 and Rs 600 crore. However, profit on account of exclusivity could be as high of Rs 956 crore and low of Rs 135 crore.
 

MILD DOSE
  Y-o-Y change (in %)* Ebidta margin
Sales Ebidta Net profit Q1FY12 Q1FY13-E
Aurobindo Pharma 16.45 9.91 -53.68 15.27 14.42
Biocon  27.08 21.01 23.44 27.26 25.96
Cadila Healthcare 20.65 9.44 -17.95 22.61 20.51
Cipla 16.93 20.33 22.81 22.34 22.99
Dishman Pharma 25.93 37.21 26.85 18.96 20.66
Divi’s Labs 39.46 43.79 36.92 36.67 37.81
Dr Reddy’s Labs 31.49 57.28 39.26 18.22 21.79
Glenmark Pharma 23.06 -10.51 -49.56 25.78 18.75
GSK Pharma 13.06 8.09 13.76 34.12 32.62
Indoco Remedies 24.34 19.68 13.70 14.75 14.19
IPCA Labs 20.59 39.60 6.83 17.81 20.62
Jubilant Life 25.35 29.82 -59.21 19.52 20.21
Lupin 29.90 42.19 26.92 18.19 19.91
Ranbaxy Labs 39.28 159.83 -51.27 8.39 15.66
Strides Arcolab -7.54 2.79 -0.29 22.40 24.90
Sun Pharma 38.96 64.01 29.83 33.42 39.45
Torrent Pharma 17.21 6.46 8.92 22.03 20.01
Unichem Labs 20.37 50.30 68.89 14.27 17.81
Total 25.62 36.62 1.84 20.68 22.50
*Average estimated growth
Source: Analyst reports

According to Nishith Sanghvi and Rahul Sharma, analysts at stock brokerage firm Karvy Stock Broking Ltd: “Ranbaxy’s net profit will be impacted by outstanding calls of $1.5 billion sold at Rs 44. The company has MTM impact on $600 million contracts on outstanding position which will be reduced by $50 million per quarter.”

Dr Reddy’s will be able to post 30 per cent growth in revenue on the back of strong growth in US generics and recovery in domestic business. Sun Pharma, according to analysts, is expected to post 40 per cent growth in revenue and a strong profit growth (30 per cent) due to the base effect of price increases in Taro Pharmaceutical Industries Ltd, which it acquired in 2010, and higher margins from Doxil supply in the US.



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