Sector Update | 12 March 2015
Healthcare | Update
Healthcare
Euro depreciation: Who gets impacted?
Recent depreciation in EUR/INR could hurt near-term profitability
EUR/INR has seen sharp
depreciation (% change)
0
EUR has depreciated by 15% (versus INR) in the last 3 months, pressurizing near-term
earnings for companies with high EU exposure. TRP and CIPLA to be most impacted.
Limited pricing power (especially in tender driven markets like Germany) would result
in EPS downgrades. This is in addition to the currency pressure in Russia/Ukraine.
Earnings implications would be lower on potential price hikes that can be passed on as
well as forward cover (in EUR) taken by select companies.
-15
-22
6 mth
EU region accounts for 5% of our coverage universe revenue, with companies like
DIVI, TRP and IPCA having a high exposure (10%+) to EU. Euro has depreciated
3 mth
1 year 3 year
15%/22% in the last three/six months against INR, which would imply lower export
Source: Bloomberg, MOSL
realizations and hence weaker profitability from the region. If EUR/INR stays at
current levels (INR66.38=1 EUR) on an annualized basis, FY16E revenue/EBITDA
assumptions for some companies could see downward revision (refer Exhibit 1).
USD/INR has remained stable of
late (% change)
26
-16
Companies with high exposure to EU may witness margin pressure
Hedges, front-end costs could cushion earnings impact
Hedging policy of most companies has been less aggressive than in the past, but still
EUR hedges can cushion near-term earnings impact. Most companies have their
own front-end presence in EU as well, wherein cost savings due to EUR depreciation
could also aid. However, in tender driven markets like Germany (largest EU generic
market) etc, the scope for price increase is low. Partnership-based model (IPCA, TRP,
DIVI) has a scope for price hike, noting the sharp forex movement. Hence, the actual
earnings hit due to EUR depreciation can be lower than estimated. Most Indian
companies generate in single digit EBITDA margin from their EU operations, implying
limited downside to overall earnings, in our view.
0
3 mth
3
3
6 mth 1 year 3 year
Source: Bloomberg, MOSL
Please refer to our sector report
dated 16 December 2014
Emerging market currency weakness to exert pressure on earnings as well
Apart from EUR depreciation, Indian companies’ earnings would be impacted by
the sharp depreciation in key emerging market currencies like Rouble (down 40%
vs INR in the last 6 months). As highlighted in our report (shown alongside), DRRD,
GNP and TRP would see pressure on margins due to EM currency crisis.
Assessing revenue/EBITDA sensitivity to EUR depreciation
Our sensitivity analysis factors the impact on FY16E assumptions from 15%
depreciation in EUR/INR (versus our assumption), assuming a large part of the
revenue miss to flow through at EBITDA level (adjusting for costs in EUR). Some
companies like IPCA, DRRD have high exposure to GBP, hence net impact on
revenues/EBITDA is lower. TRP (7%), CIPLA (4%) and DIVI (14%) appear to be the
most impacted by the recent EUR depreciation. We, however, do not revise the
EPS assumptions currently due to the high volatility in exchange rates arising from
macro factors recently. We remain positive on companies with a differentiated
pipeline in the US market (focused on complex generics) and a strong domestic
franchise. SUNP, CDH and LPC are our top picks in the sector.
Arvind Bothra
(Arvind.Bothra@MotilalOswal.com); +91 22 3982 5584
Amey Chalke
(Amey.Chalke@MotilalOswal.com);+91 22 3982 5423
12 March 2015
Investors are advised to refer through disclosures made at the end of the Research Report.
1
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Healthcare | Update
Sensitivity analysis of EUR depreciation on coverage stocks
Exhibit 1: Euro depreciation impact on coverage companies
Company
(INR m)
ALPM
CDH
CIPLA
DIVI
DRRD
GNP
IPCA
LPC
Sun +
Ranbaxy
TRP
Total
sales
20,835
86,801
111,558
31,432
147,024
68,529
32,600
129,158
288,444
46,849
FY15
Europe
sales
732
3,512
8,648
11,001
6,388
2,930
4,241
3,328
20,143
9,731
% of
total
3.5
4.0
7.8
35.0
4.3
4.3
13.0
2.6
7.0
20.8
Own
operation
No
Yes
Yes
No
Yes
Partial
No
Yes
Yes
Yes
Impact of 15 %
EUR/INR Depreciation
on FY16
on FY16
sales
EBITDA
-0.6
-0.5
-1.5
-5.3
-0.6
-0.7
-1.0
-0.4
-0.8
-2.9
-2.5
-1.5
-4.1
-14.2
-1.5
-1.9
-2.8
-0.8
-1.4
-6.9
Comments
Through partners mainly.
Mostly in France & Spain
Mostly through partners, hence low impact
Typically passes on the impact of fx change
Mainly in German market (1/3 of EU biz)
Mostly in E Europe
Mainly in UK (50% of EU sales)
Mainly in Germany
Multiple nations (inc Romania), but low margin
Mainly in Germany (Heumann)
Source: Company, MOSL
rd
Exhibit 2: Unhedged exposure in Euro currency (EUR m)
Receivables
ALPM
CDH
DIVI
DRRD
GNP
IPCA
LPC
RBXY
TRP
3.1
53.0
3.6
-
0.6
3.8
4.9
69.7
-
Payables
0.2
2.0
0.0
20.0
1.0
0.0
5.5
17.9
7.6
Source: Company, MOSL
Sharp EUR/INR depreciation in the last three months
Exhibit 3: Currency movement over three-year timeframe (%)
3 mth
EUR/INR
USD/EUR
RUB/INR
USD/RUB
USD/INR
GBP/INR
USD/GBP
-15
18
-6
7
0
-5
5
6 mth
-22
32
-40
71
3
-8
11
1 year
-16
23
-38
65
3
-5
3 year
0
25
-40
111
26
20
9
5
Source: Company, MOSL
12 March 2015
2

Healthcare | Update
Exhibit 4: EUR/INR has depreciated by 15% in the
last three months
EUR : INR
100
90
80
70
60
15% dep
in 3 month
Exhibit 5: GBP/INR has been relatively stable (down 5%)
over the last three months
114
104
94
84
74
GBP : INR
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
Exhibit 6: USD/INR remained unchanged largely
76.0
68.0
60.0
52.0
44.0
USD : INR
Exhibit 7: RUB/INR reflects currency crisis in Russia
2.5
2.0
1.5
1.0
0.5
RUB : INR
40% dep
in 6 month
Source: Bloomberg, MOSL
Source: Bloomberg, MOSL
12 March 2015
3

Healthcare | Update
Exhibit 8: Valuation comparables
Company
CMP (INR)
Mkt Cap
(USD b) Rating
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Neutral
Sell
Neutral
Neutral
EPS (INR/sh)
FY15E
31.7
49.5
130.0
15.1
8.8
54.0
29.0
26.9
41.3
15.3
66.1
20.4
49.0
85.6
FY16E
36.0
63.1
146.7
22.2
22.8
72.8
35.5
37.3
50.9
21.4
78.4
23.2
72.2
112.8
FY17E
45.2
78.0
175.8
29.3
32.4
90.0
44.1
46.3
64.0
27.2
95.3
25.6
82.5
140.9
FY15E
33
38
26
48
93
29
29
28
27
29
27
21
67
39
P/E (x)
FY16E
29
30
23
32
36
22
24
20
22
21
23
19
46
30
FY17E
23
24
19
25
25
17
19
16
17
16
19
17
40
24
EV/ EBITDA (x)
FY15E
24
23
18
26
24
20
17
15
19
13
20
14
FY16E
20
18
16
19
20
15
14
12
14
9
17
12
FY17E
16
15
13
15
15
12
11
10
11
7
14
10
Indian Generics (Large Caps)
SUNP
1036
35
LPC
1883
14
DRRD
3422
10
CIPLA
720
9
RBXY
813
6
Indian Generics (Mid Caps)
CDH
1571
5
GNP
838
4
IPCA
747
2
TRP
1094
3
ALPM
440
1
CRAMS
DIVI
1801
4
BIOS
436
1
MNCs
GLXO
3290
5
AVEN
3379
1
55
39
33
21
16
14
Source: Company, MOSL
12 March 2015
4

Healthcare | Update
NOTES
12 March 2015
5

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Healthcare | Update
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6