Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper programme of Alembic Pharmaceuticals Ltd (Alembic Pharma).

 

The ratings continue to reflect the strong position of Alembic Pharma in the domestic formulations market, its growing presence in the international generics segment and healthy financial risk profile. These strengths are partially offset by average profitability due to increased operating expenses from new manufacturing facilities, sizeable research, and development (R&D) expenditure, high share of the acute therapeutic segment in domestic formulations and exposure to intense pricing pressure and regulatory risk in the pharma industry.

 

The consolidated revenue grew by 11% year-on-year (y-o-y) in the first nine months of fiscal 2024, supported by sharp double-digit growth (~31%) in formulations sales in the international market (ex-US) compensating for the modest growth in the domestic (9%) and US business (7%). Revenue growth is estimated at 10-11% in fiscal 2024 and may remain at similar levels over the medium term, aided by steady demand for existing products and new product launches in the domestic and international segments. The operating margin had moderated sharply to 12.6% in fiscal 2023 (from 17.3% in fiscal 2022) amidst high raw material and freight cost and price erosion in the US market. This also includes the impact of accelerated amortisation of intangible assets of Aleor Dermaceuticals Ltd on it becoming the wholly owned subsidiary of Alembic Pharma. The operating margin stood at 14.3% during the first nine months of fiscal 2024. Nevertheless, with higher operating expenses and lower capacity utilisation of the new manufacturing facilities, the operating margin is estimated to remain low at 14-15% in fiscal 2024, partly aided by rationalisation of R&D expenses (estimated at 7-8% of sales). Going forward, with gradual ramp up in sales, the margin should improve to 16-17% over the medium term.

 

The working capital intensity continues to be moderately high. Gross current assets are expected to be at 180-200 days over the medium term (182 days as on March 31, 2023), given the focus on maintaining larger inventory to capitalise on any market opportunity and avoid any supply-side disruption. The company has incurred sizeable, debt-funded capital expenditure (capex) over the past few fiscals towards specialised generics. It has further planned to incur annual capex of Rs 250-300 crore over the medium term towards routine maintenance, which shall remain funded through internally generated funds. Financial risk profile remains healthy, with only short-term debt outstanding, translating into comfortable debt protection metrics.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of Alembic Pharma and its three subsidiaries and seven step down subsidiaries. These entities are strategically important to and have a significant degree of operational integration with Alembic Pharma. CRISIL Ratings has applied a moderate consolidation approach for four associate companies and two joint ventures and has factored in the share of profit and requirement of any incremental investment.

 

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 position in the domestic formulations market: The company is among the top 25 players in the domestic formulations market. Revenue stood at Rs 1,697 crore for the first nine months of fiscal 2024, indicating 11% growth (y-o-y) over the previous corresponding period. The company has a portfolio of about 200 formulation brands, of which three are among the top 300 domestic formulations brands in India. It has a share of 1.5% in the domestic market as per IQVIA MAT December 2023. Growth in the branded formulations segment will be backed by increased contribution from the chronic therapeutic segment and regular product launches, leading to volume growth.

 

• Diversified presence in the international market: The international market (including bulk drugs) accounted for 64% of total revenue in the first nine months of fiscal 2024 (63% in fiscal 2023). US is a key market and formed 28% of total revenue over the same period. Apart from the US, Alembic Pharma has sizeable presence in Europe, Canada and Australia. With greater focus on the US, the company has gradually stepped up its abbreviated new drug application (ANDA) filings over the past few fiscals: 20 in fiscal 2023 from 8 in fiscal 2016. US sales grew by 7% y-o-y in the first nine months of fiscal 2024, on a lower base, supported by new product launches and against a degrowth of 6% in fiscal 2023. New product launches, market share gains and long-term relationships with large clients would support revenue in the regulated market over the medium term. As on December 31, 2023, Alembic Pharma had filed for 257 ANDAs, of which 196 were approved.

 

• Healthy financial risk profile: Despite the impairment recognition of Rs 1,150 crore during March 2023, the financial risk profile stood healthy, as reflected in tangible networth of Rs 4,370 crore and low gearing of 0.15 time on March 31, 2023. Interest coverage ratio was comfortable at 13.55 times in fiscal 2023 and at 15.42 times for the first nine months of fiscal 2024. Over the past few fiscals, the company has incurred sizeable, debt-funded capex towards specialised generics. Capex is expected at Rs 250-300 crore annually over the medium term, to be funded by cash accrual. Thus, debt protection metrics should continue to be comfortable. However, any major capex or debt-funded acquisition remains a key rating sensitivity factor.

 

Weaknesses:

• Profitability remains constrained by sub-optimal utilisation of new facilities, price erosion in US markets: Alembic Pharma’s new manufacturing facilities (F2, F3, F4) have been operating at sub-optimal levels of 10-15% with a gradual pick up expected in the next 3-4 years. The low-capacity utilisation shall result in an increase in the operating expenses by Rs 240 crore annually, thereby constraining profitability. Further, the company ramped up its R&D spends, particularly in the past five fiscals, to capitalise on differentiated generics opportunities in the US. R&D expenditure was high (at 12-14% of sales) in the past to build the ANDA pipeline. Therefore, given the operating losses from the new facilities amid the prevailing issues of price erosion in the US, the adjusted operating margin moderated to 14.3% during the first nine months of fiscal 2024. Besides, high share of acute therapies and intense competition in the domestic market continue to have a bearing on profitability.

 

Operating margin is expected at 14-15% in fiscal 2024, supported by rationalisation of R&D expenses (7-8% of sales for the first nine months of fiscal 2024). However, roll out of new product launches in differentiated generics will be critical for maintaining and enhancing operating profitability.

 

• Exposure to intensifying pricing pressure and regulatory risk: The company remains exposed to risk posed by regulatory changes in India and the overseas markets, as reflected in increasing scrutiny and inspections by authorities, including the US Food and Drug Administration, European Medicines Agency and TGA Australia. Any adverse findings from these regulators shall remain monitorable. In the domestic market, the regulatory impact of Drug Pricing Control Order and ban on some fixed-dose combinations adversely affected revenue and profit in the past and will also be monitorable.

Liquidity: Strong

The company had liquid surplus of Rs 156 crore as on December 31, 2023. Cash accrual is projected at over Rs 650 crore in fiscal 2024, sufficient to cover the routine capex; cash accrual is expected at  Rs 700-800 crore per annum over the medium term. The company only has short-term debt outstanding. Bank limit utilisation was less than 50% during the 12 months through January 2024. Comfortable debt protection metrics enhances the fund-raising ability.

 

ESG profile

The environment, social, and governance (ESG) profile of Alembic Pharma supports its strong credit risk profile.

 

The pharmaceutical sector can have a significant impact on the environment owing to greenhouse gas emissions, water use and waste generation. The sector’s social impact is characterised by the impact on the health and wellbeing of consumers due to its products and on employees and the local community on account of its operations.

 

Key ESG highlights

• The company has undertaken focussed efforts towards energy conservation and achieved an overall 19% reduction in the total energy consumption in fiscal 2023. It also achieved a 10% reduction in Scope 1 and 19% reduction in Scope 2 emission during the year.
• The company has deployed water management practices and processes all liquid waste. Also, the company recharges more water into the underground water table than what it consumes. It has achieved an 42% increase in the rainwater harvested with 28% reduction in water consumption in fiscal 2023.
• It has implemented human rights policy and prevention of sexual harassment policy. Gender diversity in Alembic Pharma is marginally lower than industry peers, with women employees comprising 4-5% of the workforce over past few years.
• Alembic Pharma has adequate governance structure, with majority of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Alembic Pharma’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensuring ease of raising capital from markets where ESG compliance is a key factor.

Outlook: Stable

The business risk profile is likely to benefit from the diversified segmental and geographical presence of the company in the pharmaceutical space. However, the operating margin will remain average amidst gradual ramp up in the new facilities, intense competition, price erosion in US, inflation driven cost and R&D spends. Healthy cash generation and near debt free capital structure will help sustain healthy financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Double-digit revenue growth supported by new product launches and better diversity in revenue streams with operating profitability improving above 20-22% on a sustained basis, resulting in better-than-expected cash generation
• Prudent capital spending and working capital management along with healthy cash generation will ensure maintenance of healthy financial risk profile and comfortable debt protection metrics

 

Downward factors:

• Lower-than-expected revenue growth and operating profitability remaining below 14-16% on a sustained basis, also impacting cash generation
• Larger-than-expected working capital requirement or capex and acquisitions, leading to moderation in debt protection metrics

About the Company

The pharmaceuticals business of Alembic Ltd, comprising domestic formulations, international generics and active pharmaceutical ingredients (APIs), was transferred to Alembic Pharma, following the latter’s demerger from Alembic Ltd effective April 1, 2010. Vadodara-based Alembic Pharma manufactures a range of formulations and bulk drugs for the domestic and international markets. It has nine manufacturing facilities for formulations and APIs and three R&D facilities.

 

Alembic Pharma is listed on the Bombay Stock Exchange and the National Stock Exchange. As on December 31, 2023, the promoters and group entities held 69.61% stake, foreign portfolio investors held 4.52%, individuals held 11.37% and the balance was held by others.

 

Profit after tax (PAT) stood at Rs 438 crore on revenue of Rs 4,712 crore for the first nine months of fiscal 2024, against Rs 189 crore and Rs 4,246 crore, respectively, in the corresponding period of fiscal 2023.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit & Working Capital Demand Loan**	NA	NA	NA	600	NA	CRISIL AA+/Stable
NA	Commercial paper	NA	NA	7-365 days	750	Simple	CRISIL A1+

**100% interchangeability between funded and non-funded