Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank loan facilities of Aarti Drugs Ltd (ADL, part of the Aarti group).

 

In fiscal 2024 and in the first half of fiscal 2025, the business risk profile of the group has continued to moderate. At the group level, revenue was Rs 2,509 crore in fiscal 2024, an on-year degrowth of 7%, and Rs 1,156 crore in the first half of fiscal 2025, as against Rs 1,309 crore in the corresponding period of fiscal 2024. The group is expected to achieve revenue of more than Rs 2,600 crore in fiscal 2025 with operating profitability of more than 13%.

 

The business risk profile was impacted mainly due to fall in active pharmaceutical ingredient (API) prices, affecting realisation, along with lower demand from end users, specifically in export markets. Consequently, net cash accrual was lower than expected. However, the financial risk profile continues to remain strong, supporting the credit risk profile.

 

The financial risk profile of the group is driven by strong networth, improving capital structure and adequate debt protection metrics. Networth of Rs 1,277 crore as on September 30, 2024, coupled with lower reliance on external debt for meeting working capital requirement will lead to improvement in the capital structure.

 

Further, the group had cash and equivalent and investments of Rs 14.12 crore as on September 30, 2024. Liquidity is expected to remain strong, backed by strong cash flow, low utilisation of fund-based working capital limit and moderate cash and equivalent, over the medium term.

 

The ratings continue to reflect the Aarti group’s established market position in the APIs business, sound operating efficiency and strong financial risk profile. These strengths are partially offset by working capital-intensive operations and susceptibility of operating margin to fluctuations in raw material prices, intense competition and regulatory changes.

Analytical Approach

 For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of ADL and its wholly owned subsidiary, Pinnacle Life Science Pvt Ltd (PLSPL; 'CRISIL A+/Stable/CRISIL A1'). This is because these companies, together referred to as the Aarti group, have operational and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the APIs business: The Aarti group is one of the leading manufacturers of APIs in India, operating in over 12 therapeutic segments with expertise in antibiotic and antidiarrhea segments and increasing focus in anti-protozoa, antifungal and antidiabetic segments. The group is adding new product capacities as well as enhancing existing capacities. ADL has a diversified clientele with presence in domestic as well as export markets.

 

• Sound operating efficiency: The group has healthy operating efficiency supported by high economies of scale and enhanced backward and forward integration for key products and research and development capabilities, which help develop new products and improve processes to optimise costs. While the operating margin was impacted in the first half of fiscal 2025 on account of sharp raw material price movement and negative rate variance, the operating margin is expected to remain steady at 12-13% over the medium term.

 

• Strong financial risk profile :Total outside liabilities to adjusted networth ratio of less than 1 time and networth of Rs 1,277 crore as on September 30, 2024, represent a healthy capital structure. Debt protection metrics were robust, as indicated by interest coverage and net cash accrual to adjusted debt ratios of 9.50 times and 0.3 time, respectively, in fiscal 2024 and 7.67 times and 0.08 time, respectively, as on September 30, 2024. The financial risk profile will likely be maintained over the medium term despite debt-funded capital expenditure (capex), supported by the management’s conservative debt policy and expected improvement in operating performance.

 

Weaknesses:

• Large working capital requirement :Operations are working capital intensive, as indicated by gross current assets (GCAs) of 190- 200 days over the three fiscals ended March 31, 2024, driven by receivables of 100-110 days and inventory of 80-90 days. As a result, majority of the accretion is utilised towards meeting working capital requirement and capex.

 

• Susceptibility to fluctuations in raw material prices, intense competition and regulatory changes :Although the group has the ability to pass on increases in raw material prices to customers, the operating margin is susceptible to sharp changes in raw material prices. Majority of the raw material is imported from China, which exposes the group to geopolitical risks. While it has found alternative sources for some raw materials, meaningful diversification of raw material procurement from non-Chinese suppliers will be monitorable over the medium term.

 

Furthermore, the bulk drugs industry is highly competitive due to presence of numerous domestic as well as global players, which exerts pricing pressure on the group. This necessitates the group to remain cost competitive to maintain profitability. Indian players, including ADL, also face challenges from increase in inspections and regulatory actions by authorities such as the US Food and Drug Administration.

Liquidity: Strong

The group will have strong liquidity supported by expected cash accrual of Rs 220 crore per annum over the medium term and unencumbered cash and equivalent and investments of Rs 14.12 crore as on September 30, 2024. At the group level, fund-based bank limit was utilised 44% on average over the 12 months through June 2024. The company has term debt obligation of Rs 40-70 crore and capex of Rs 150-200 crore per annum over the medium term.

 

Net cash accrual, unutilised bank limits and cash and equivalent will be sufficient to fund working capital requirement, debt obligation and capex over the medium term.

Outlook: Stable

CRISIL Ratings believes the Aarti group will continue to benefit over the medium term from the growth prospects for its products. This will help in gradual improvement in utilisation of capacities and in maintaining the operation margin.

Rating sensitivity factors

Upward factors:

• Sustained revenue growth with operating margin remaining above 15% backed by successful ramp-up of operations from planned capacity expansions and product diversification, leading to higher net cash accruals
• Sharp improvement in working capital cycle
• Sustenance of financial risk profile

 

Downward factors:

• Decline in revenues and operating margins continuing to remain below 11%, resulting in lower-than-expected accruals
• Cost or time overruns in planned capacity expansions leading to significant deterioration in financial risk profile
• Increase in working capital requirements, larger-than-expected, debt-funded capex or acquisition, or more-than-expected dividend pay-out, weakening the financial risk profile, particularly liquidity

About the Group

ADL, incorporated in 1984, manufactures APIs, formulations, advance intermediates and specialty chemicals; APIs account for almost 80% of revenue. ADL has 11 manufacturing facilities certified under good manufacturing practices in Maharashtra and Gujarat. The company operates in over 90 countries. It is listed on the Bombay Stock Exchange and the National Stock Exchange.

 

PLSPL, incorporated in 2003, manufactures and packages pharmaceutical formulations. ADL acquired PLSPL in September 2014, making it a wholly owned subsidiary. PLSPL recommenced commercial operations in December 2014. Most of its requirement of APIs is met by ADL.