Rating Rationale
October 26, 2020 | Mumbai
Aarti Drugs Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1536 Crore (Enhanced from Rs.1246 Crore)
Long Term Rating CRISIL A+/Positive (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of Aarti Drugs Limited (ADL, part of Aarti group) continue to reflect Aarti group's strong market position in the active pharmaceutical ingredients (APIs) business, sound operating efficiencies and strong financial risk profile. These strengths are partially offset by working capital intensive nature of operations and susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks.
 
CRISIL had earlier revised its outlook on the long-term bank facilities of ADL to 'Positive' from 'Stable' while reaffirming the ratings at 'CRISIL A+/CRISIL A1' vide its rating rationale dated October 15, 2020.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of ADL and its wholly owned subsidiary, Pinnacle Life Science Pvt Ltd (PLSPL), herein after referred to as the Aarti group, as there are operational and financial linkages between these entities.

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: 
* Strong market position in the active pharmaceutical ingredients (APIs) business
Aarti Group is one of the leading manufacturers of APIs in India, operating in over 12 therapeutic segments with expertise in the antibiotic and antidiarrheal segments.  Furthermore, it has been increasing its focus on the antifungal and antidiabetic segments by adding new product capacities or enhancing existing capacities. ADL has a diversified customer base and presence in domestic as well as export markets. Revenues have increased to over Rs 1806 crore in fiscal 2020 from Rs 1562 crore in fiscal 2019. However absence of any major product launches, and absence in the complex generic/molecules will restrict any major realization improvement.
 
* Sound operating efficiencies
Aarti group has healthy operating efficiencies supported by high economies of scale and enhanced level of backward and forward integrations for key products and research and development capabilities, which help develop new products and improve processes to optimize costs. EBITDA margin improved to 14.72% in fiscal 2020 from 13.58% in fiscal 2019. EBITDA margin further improved to ~25% in Q1FY21; backed by healthy realization and volume growth.    
 
* Strong financial risk profile
Networth was robust at Rs 651 crore as on March 31, 2020, with moderate total outside liabilities to adjusted net worth ratio of 1.42 times. Also, interest coverage and net cash accrual to adjusted debt ratios were comfortable at 7.25 times and 0.48 times, respectively, in fiscal 2020. Financial risk profile is expected to be maintained over the medium term despite debt funded capex supported by Aarti group management's conservative policy towards debt.  
 
Weakness:
* Working capital intensive nature of operations
Working capital requirements remain high at GCA of 182 days as on March 31, 2020. As a result majority of the accretions are utilised towards working capital and capital expenditure requirements of the company.
 
* Susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks
The bulk drugs industry is highly competitive due to presence of numerous domestic as well as global players, which exerts pricing pressure on individual entities. This necessitates the company 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 (FDA).
 
Further, majority of raw material (55-60%) is imported from China which exposes group to geo-political risks. While group has found alternate procurement sources for some raw materials; meaningful diversification of raw material procurement from non-Chinese suppliers would be monitorable going ahead.
Liquidity Strong

Aarti Group has strong liquidity driven by expected cash accruals of Rs 190 - 220 crore per annum in fiscal 2021 and fiscal 2022 and unencumbered cash and cash equivalents of Rs 16 crore as on March 31, 2020. The company also has access to bank limits of Rs 601 crore, utilized to the tune of around 73% over the 12 months trailing August, 2020. The company has long term repayment obligation of around Rs 39 crore and Rs 41 crore each in fiscal 2021 and fiscal 2022 respectively and capex of around Rs 100-125 crore each planned over fiscal 2021 & fiscal 2022. The liquidity is further supported by unsecured loans extended by the promoters to the tune of Rs. 8.57 crore as on March 31, 2020. This funding support is expected to continue over the medium term. CRISIL believes ADL's net cash accruals, unutilized bank limits and cash and cash equivalents will be sufficient to fund its incremental working capital, debt repayment and capex requirements over the medium term.

Outlook: Positive

CRISIL believes the Aarti groups' business risk profile will improve over the medium term backed by good growth prospects for its products. This will help in gradual improvement in utilization of capacities to be added and in maintaining operation margin.

Rating Sensitivity factors
Upward factor
* Sustained revenue growth of over 12% per fiscal backed by successful ramp-up of operations from planned capacity expansion, while maintaining operating margin leading to net cash accruals of over Rs 230 crore for fiscal 2022
* Sharp improvement in working capital cycle or TOLTNW ratio
 
Downward factor
* Decline in net cash accruals to below Rs 150 crore
* Disruptions in business due to macro-economic factors, especially in China
* Increase in working capital requirement, 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 contribute almost 80% to the total 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 National Stock Exchange.
 
PLSPL, incorporated in 2003, manufactures and packages pharmaceutical formulations. ADL acquired PLSPL in September 2014, making it a wholly own subsidiary. PLSPL recommenced commercial operations in December 2014. Most of its requirement of active pharmaceutical ingredients (APIs) is met by ADL.

Key Financial Indicators - Consolidated
Particulars Unit 2020 2019
Revenue Rs.Cr 1806.4 1562.2
Profit After Tax (PAT) Rs.Cr 141.4 89.75
PAT Margin % 7.89 5.75
Adjusted Debt/Adjusted Networth Times 0.59 0.94
Interest coverage Times 7.25 4.99

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
Allotment		 Coupon
Rate (%) 		Maturity date Issue Size
(Rs. Cr)		 Complexity Levels Rating Assigned
with Outlook
NA Cash Credit NA NA NA 33 NA CRISIL A+/Positive
NA Composite Working Capital Limit NA NA NA 1200 NA CRISIL A1
NA External Commercial Borrowings NA NA Sep-2025 111 NA CRISIL A+/Positive
NA Proposed Working Capital Facility NA NA NA 2.62 NA CRISIL A+/Positive
NA Term Loan NA NA Mar-2026 189.38 NA CRISIL A+/Positive
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Aarti Drugs Limited Full Consolidation Similar line of business with operational synergies and wholly owned subsidiary
Pinnacle Life Science Pvt Ltd Full Consolidation Similar line of business with operational synergies and wholly owned subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --    --  31-12-18  Withdrawal  09-08-17  CRISIL A1  CRISIL A1 
                05-10-18  CRISIL A1       
                20-08-18  CRISIL A1       
                19-03-18  CRISIL A1       
Fund-based Bank Facilities  LT/ST  1536.00  CRISIL A+/Positive/ CRISIL A1  15-10-20  CRISIL A+/Positive/ CRISIL A1  23-07-19  CRISIL A+/Stable/ CRISIL A1  31-12-18  CRISIL A/Positive/ CRISIL A1  09-08-17  CRISIL A/Stable/ CRISIL A1  CRISIL A/Stable/ CRISIL A1 
                05-10-18  CRISIL A/Positive/ CRISIL A1       
                20-08-18  CRISIL A/Positive/ CRISIL A1       
                19-03-18  CRISIL A/Stable/ CRISIL A1       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 33 CRISIL A+/Positive Cash Credit 30 CRISIL A+/Positive
Composite Working Capital Limit 1200 CRISIL A1 Composite Working Capital Limit 991 CRISIL A1
External Commercial Borrowings 111 CRISIL A+/Positive Proposed Long Term Bank Loan Facility 27.06 CRISIL A+/Positive
Proposed Working Capital Facility 2.62 CRISIL A+/Positive Term Loan 197.94 CRISIL A+/Positive
Term Loan 189.38 CRISIL A+/Positive -- 0 --
Total 1536 -- Total 1246 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for the Pharmaceutical Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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