Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Aculife Healthcare Private Limited (Aculife) to ‘CRISIL A/Positive/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The rating action reflects CRISIL Ratings expectation of sustenance in the improvement in Aculife’s business risk profile, supported by consolidation of its established market position in the high volume parenterals business, higher share of revenue from the high-margin specialty parenteral business, and increasing product and geographical diversity. The company is expected to register double-digit revenue growth over the medium term, while also sustaining its operating margins at healthy levels of over 22-24%, with focus on higher value added products and increasing presence in overseas markets.

 

The company’s financial risk profile, which benefitted from higher cash generation and prudent capital spend in fiscal 2021, is also likely to remain healthy. Aculife is proposing to undertake capital expenditure (capex) of Rs 140-150 crores to be spread over a period of two years towards new EU-GMP (good manufacturing practices) to be put in place along with the upgradation of facility to manufacture new products like large volume bags, gaseous anaesthesia injections, repsules, opthomology products etc. As major portion of the capex is expected to be funded from accruals, key debt metrics such as Debt to EBITDA (earnings before interest, tax, depreciation and amortisation) and gearing, which improved to 1.23 times and 0.7 times at March 31, 2021, from 2.56 times and 1.48 times in fiscal 2020, are likely to improve over the medium term.

 

Besides, the company’s credit risk profile also benefits from being part of the Nirma Group. The group’s promoters, Dr. Karshanbhai Patel and family, hold 100% equity stake in the company and are expected to lend necessary support to the company, when required, as also demonstrated in the past. Also, key management personnel from the group provide strategic inputs and oversight over operations of Aculife.

 

In fiscal 2021, despite a weak first quarter impacted by the pandemic, Aculife’s revenues are estimated to have grown by 5% to Rs 469 crores, from Rs 448 crores a year earlier, driven by higher growth in specialty products and good export demand, including for high value parenterals. The nationwide pandemic led to lower demand in the acute segment, which impacted off-take for the normally high volume parenteral segment. Its operating margin improved by 520 basis points to 24% in fiscal 2021, from 18.8% in fiscal 2020, due to higher share of revenue from specialty products, and cost optimisation measures undertaken.

 

The ratings continue to reflect Aculife’s strong market position in the parenteral business, and its healthy operating profitability, and improving financial risk profile. Besides, Aculife also benefits from being part of the Nirma group, which provides management oversight and enhances the company’s access to funds. These strengths are partially offset by intense competition in the companies’ major business segment, and working capital-intensive operations.

Analytical Approach

CRISIL Ratings has consolidated Aculife and its subsidiaries, considering the commonality of operations and management.

 

Preference shares subscribed to by Nirma group’s promoters have been treated as 75% equity and 25% debt. Preference share capital, which is due to be redeemed in June 2022, is likely to be rolled over or replaced with a similar instrument with longer maturity, to support operations. Furthermore, these bear a low coupon rate and are subordinated to bank debt.

 

CRISIL Ratings has also factored in need based support from the Nirma Group.

 

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 parenteral business: The company is one of the leading players in the parenteral business, supported by strong brands (Nirlife and One Use), and presence in the domestic and international markets. Revenue is estimated to have grown by 5% in fiscal 2021 to Rs 469 crore from Rs 448 crore in fiscal 2020, owing to increasing contribution from the high-value-added products primarily speciality division, led by introduction of new products in the market, and good export demand, including for high value parenterals.  The share of exports in total revenues increased to 42% in fiscal 2021, from 33% in fiscal 2020. Revenues are expected to register growth of over 12% over the medium term, backed by greater focus on high-value-added products, entry into new geographies and introduction of new products, which would lead to improvement in the overall business risk profile

 

• Healthy operating profitability: Apart from an increase in share of high-margin products, other factors such as cost optimisation, withdrawal from some rural markets and suspension of the loss-making medical devices division, have helped improve profitability. The company had undertaken capex to semi-automate the packaging process, and further reduce labour cost. Operating margin improved to 24% in fiscal 2021 from 18.8% in the previous fiscal owing to increased focus on high- value-added products and cost optimisation measures. The margin is expected to be sustained at over 22-24% over the medium term as well owing to focus on high-value products, introduction of new products and with entry into newer geographies such as Russia, Middle East, West and South Africa and also regulated markets such as Canada, Europe, New Zealand and Australia, which offer higher margins

 

• Improving financial risk profile: Financial risk profile is marked by declining leverage, and improving interest cover (over 5 times), mainly due to better profitability, and hence cash generation. The company incurred only modest capex of Rs. 52 crore over the last two years, but it proposing to undertake capex of Rs 140-150 crores spread over fiscals 2022 and 2023, towards new EU-GMP (good manufacturing practices) to be installed, along with the upgradation of facility to manufacture new products. As major portion of the capex is expected to be funded from accruals, key debt metrics such as Debt to EBITDA (earnings before interest, tax, depreciation and amortisation) and gearing, which were at 1.23 times and 0.7 times at March 31, 2021, are likely to improve over the medium term. Any significant debt funded capex or acquisitions, limiting improvement in key debt metrics will be a key monitorable.

 

• Support from Nirma group: Key management personnel drawn from the Nirma group, over time, have provided oversight and have been involved in key strategy planning, with the healthcare business also being critical for the Nirma group. Besides, the promoters have supported Aculife by subscribing to preference shares to support operations, and at flexible terms. Given Aculife’s increasing scale of operations and good prospects for the healthcare sector, CRISIL Ratings expects the support from Nirma group to continue.

 

Weaknesses

• Exposure to intense competition in the parenteral division: About 53% of revenue is derived from the high-volume, low-value parenteral division in which orders are mainly tender-based and the company has low bargaining power. However, it has been focusing on higher value specialty products in which there is greater bargaining power; this is expected to improve the operating margin and provide stability.
• Working capital-intensive operations: Operations have historically been working capital intensive with inventory days of around three-four months and receivables cycle of around one –two months. The management has been focussing on efficiently managing the same and currently gross current assets have come down to an estimated 144 days for fiscal 2021 as against 170-180 days earlier. However, with increasing focus on exports, working capital cycle may get elongated due to higher lead and transit time.

Liquidity: Adequate

Liquidity remains adequate, aided by low bank limit utilisation (less than 10% utilisation in 11 months ending March 2021 – total limit of Rs.145 crores), and improving cash accrual. Annual cash accrual of over Rs 130-140 crore, expected in fiscals 2022 and 2023 each, should comfortably cover the annual repayment obligations of Rs 60 crores for fiscal 2022 and sizeable portion of capex of Rs 140-150 crores over the next 2 years. Further, CRISIL Ratings believes that Aculife being a part of Nirma Group would receive need based support from the parent as and when required adding to its financial strength.

Outlook: Positive

CRISIL Ratings believes Aculife will benefit from its established position in the parenteral segment, improving share of high value specialty products, better product and geographical diversity, and healthy operating efficiencies. Its financial risk profile will also benefit from improved cash generation and controlled debt levels, despite higher capex over the next 2 fiscals. Need based and timely support from the Nirma group is expected to continue, and the rating will remain sensitive to any changes in the credit profile of the group.

Rating Sensitivity Factors

Upward factors

• Sustained healthy revenue growth with operating margin of over 22-24%, leading to healthy cash generation
• Sustained improvement in financial risk profile and key debt metrics

 

Downward factors

• Sluggish revenue growth, with the operating margin dipping below 14-15%, also impacting cash generation
• Any large, debt-funded acquisition, or capital expenditure, or elongation of working capital cycle, preventing the envisaged improvement in debt metrics
• Change in stance of support from the Nirma Group

About the Company

Aculife was incorporated in 2014 by demerging the healthcare division (Nirlife) of Nirma Ltd (‘CRISIL AA/Stable/CRISIL A1+’). Nirlife was founded by acquiring a parenteral manufacturing company with a track record of two decades.

 

Aculife offers over 600 products in multiple markets and therapeutic areas, including anaesthesia, critical care, anti-infectives, renal care, infusion therapy and parenteral nutrition. It offers injectables in various forms such as glass and plastic bottles, vials, ampoules, and pre-filled syringes. The products are marketed under Nirlife and One Use brands. The customer base primarily includes government and private hospitals, aid agencies, and nursing homes. Aculife has an established market position and a large product portfolio in emerging markets, such as Latin America, the Middle East, Commonwealth of Independent States (CIS), Africa, and Asia.

Key Financial Indicators*

Particulars	Unit	2021^	2020
Revenue	Rs.Crore	469	448
Profit After Tax (PAT)	Rs.Crore	48	-21
PAT Margin	%	10.2	-4.6
Adjusted debt/adjusted networth	Times	0.7	1.48
Interest coverage	Times	5.02	2.53

^Provisional

*Adjusted for goodwill

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity level	Rating Assigned with Outlook
NA	Term Loan	NA	NA	Dec-2021	60	NA	CRISIL A/Positive
NA	Cash Credit	NA	NA	NA	100	NA	CRISIL A/Positive
NA	Cash Credit@	NA	NA	NA	45	NA	CRISIL A/Positive
NA	Letter of Credit*	NA	NA	NA	50	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	30	NA	CRISIL A/Positive
NA	Proposed term loan	NA	NA	NA	210	NA	CRISIL A/Positive

@Fully interchangeable with non-fund based limits

*Fully interchangeable with bank guarantee