Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Alembic Pharmaceuticals Limited (Alembic Pharma). The rating on the NCDs totalling Rs 500 crore are also withdrawn as per client request, following repayment of the same, and confirmation from the trustee. The withdrawal is in line with CRISIL Ratings’ policy for withdrawal of ratings.

 

Consolidated revenue declined 2% on-year in fiscal 2022 due to de-growth in the US portfolio, given intense price erosion. Healthy pick-up was witnessed in domestic sales, which grew by 29% on-year in fiscal 2022. In the first quarter of fiscal 2023, revenue degrew by 5% on-year due to lower volume in the active pharmaceutical ingredients (API) segment. Revenue growth is likely to be modest in fiscal 2023; steady demand for existing products and new product launches in the international and domestic segments would support revenue growth momentum of 8-10% over the medium term.

 

Operating margin moderated to 17.3% in fiscal 2022 from 28.9% in fiscal 2021 due to sharp increase in the raw material and freight costs as well as lower realisations for few key products. The margin moderation also factors in impact of Rs 122 crore in the fourth quarter of fiscal 2022 towards the accelerated amortisation of intangible assets of Aleor Dermaceuticals Ltd (Aleor) on it becoming the wholly-owned subsidiary of the company. Margin is expected to moderate further in fiscal 2023 given the sustained elevated costs, pricing pressure in the US, and continued research and development (R&D) expenses, before improving to 18-20% over the medium term.

 

Working capital intensity remains moderately high. Gross current assets are expected at 180-200 days over the medium term (193 days as on March 31, 2022), given the focus on maintaining larger inventory to capitalise on any market opportunity and avoid any supply-side disruption. The company incurred sizeable, debt-funded capital expenditure (capex) over the past few fiscals towards specialised generics. Capex is expected at Rs 200-400 crore annually over the medium term. Financial risk profile remains healthy, with only short-term debt outstanding and healthy cash accrual, translating into comfortable debt protection metrics.

 

The ratings continue to reflect the strong position of Alembic Pharma in the domestic formulations market, growing presence in the international generics segment, and healthy financial risk profile. These strengths are partially offset by average profitability due to sizeable R&D expenditure, high share of the acute therapeutic segment in domestic formulations and exposure to intensifying pricing pressure and regulatory risks.

Analytical Approach

CRISIL Ratings has fully consolidated the business and financial risk profiles of Alembic Pharma and its three subsidiaries and seven stepdown subsidiaries, which are strategically important to, and have a significant degree of operational integration with, Alembic Pharma. CRISIL Ratings applied a moderate consolidation approach for four associate companies and two joint venture for which the share of profit and any incremental investment required are factored in.

 

Please refer Annexure - List of entities consolidated, which shows the 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 was Rs 1,926 crore in fiscal 2022 (healthy growth of 29% on-year driven by Covid-related sales on a lower base). 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. 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

Revenue from the international market (including bulk drugs) was 64% of the total revenue in fiscal 2022 (72% in fiscal 2021). US is a key market for the company and sales in US forms 31% of the total revenue. Apart from the US, the company has sizeable presence in Europe, Canada, and Australia. On account of greater focus on the US, Alembic Pharma has gradually stepped up its abbreviated new drug application (ANDA) filings in the last few fiscals: 23 in fiscal 2022 from eight in fiscal 2016. In fiscal 2022, US sales degrew by 23% on-year due to significant price erosion and intense competition in the Sartan portfolio. New product launches and long-term relationships with large clients would support revenue in the regulated market over the medium term. As on June 30, 2022, Alembic Pharma had filed for 237 ANDAs, of which 167 were approved.

 

Healthy financial risk profile

Financial risk profile is healthy, as reflected in adjusted networth of over Rs 5,000 crore and low gearing of 0.12 time on March 31, 2022. Interest coverage ratio was comfortable at 53.9 times in fiscal 2022. The company incurred sizeable, debt-funded capex over the past few fiscals towards specialised generics. Capex is expected at Rs 200-400 crore annually over the medium term, to be funded by cash accrual. Thus, debt protection metrics are expected to remain comfortable. Larger-than-expected capex or debt-funded acquisition remains a key rating sensitivity factor.

 

Weakness:

Profitability constrained by high R&D expenditure, price erosion in US markets

Alembic Pharma had stepped-up R&D spends, particularly in the past 4-5 fiscals, to capitalise on differentiated generics opportunities in the US. R&D expenditure remained high at 12-14% of sales in the past to build the ANDA pipeline. With sharp increase in the raw material and freight cost and severe price erosion in the US market, the operating margin moderated to 17.3% in fiscal 2022 from 28.9% in fiscal 2021. The moderation also included Rs 122 crore of impact due to amortisation of intangible assets of Aleor on becoming a wholly-owned subsidiary of the company in the fourth quarter of fiscal 2022. Besides, high share of acute therapies in the domestic market where competition is intensifying, also impacted profitability.

 

Operating margin is expected to moderate further this fiscal due to elevated costs, pricing pressures in the US market, and R&D spend, before improving to 18-20% over the medium term. The company is also expected to rationalise its R&D spend to support the operating margin going forward. 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 risks

The company is exposed to regulatory changes in the Indian and global markets, as reflected in increasing scrutiny and inspections by authorities, including the US Food and Drug Administration (USFDA), European Medicines Agency and TGA Australia. The general injectable and ophthalmic facility in Karkhadi, Gujarat, was re-audited by the USFDA in September 2022 and the oncology injectable facility located at Panelav was audited in October 2022. Company received few observations under form 483 for both facilities. The company is in the process of addressing the observations received. 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 be a monitorable.

Liquidity: Strong

Liquid surplus was Rs 61 crore as on March 31, 2022, and net cash accrual expected at over Rs 550 crore in fiscal 2023, should sufficiently cover the capex requirement. The company only has short-term debt outstanding, having repaid the NCDs in the first quarter of fiscal 2023. Working capital utilisation  averaged less than 25% over the 12 months through August 2022. Comfortable debt protection metrics, enhances the company’s fund-raising ability. The company has also raised equity through qualified institutional placement in the recent past.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes Alembic Pharma’s ESG profile 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 impact on the health and wellbeing of consumers due to its products and on employees and local community on account of its operations.

 

Key ESG highlights

• The company has undertaken focussed efforts towards energy conservation and achieved an overall 12% reduction in the total energy consumption in fiscal 2022. It also achieved a 5% reduction in CO2 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 achieved an 18% increase in the rainwater harvested in fiscal 2022.
• 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 5-6% 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 ensure ease of raising capital from markets where ESG compliance is a key factor.

Outlook: Stable

Alembic Pharma’s business risk profile is likely to benefit from its diversified segmental and geographical presence in the pharmaceutical space, even though operating profitability will remain average due to intense competition, price erosion in US markets, inflation driven costs and R&D spend. Healthy cash generation and prudent capital spending 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 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
• Gradual build-up of liquid surpluses

 

Downward Factors

• Lower-than-expected revenue growth and operating profitability remaining below 16-18% 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 (AL), comprising domestic formulations, international generics and APIs, was transferred to Alembic Pharma following the latter’s demerger from AL 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 September 30, 2022, the promoters and group entities held 69.61% stake, foreign portfolio investors held 5.32%, individuals held 9.12% and the balance was held by others.

 

For the quarter ended June 30, 2022, the company reported a net loss of Rs 66 crore (profit after tax [PAT] of Rs 158 crore in the corresponding period of fiscal 2022) on net sales of Rs 1,262 crore (Rs 1,326 crore). The net loss was largely owing to continued expensing of intangibles of Aleor.

Any other information: Not applicable