Detailed Rationale

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

 

The ratings continue to reflect the established position of Alkem in the domestic formulations market and strong financial risk profile. These strengths are partially offset by high dependence on the acute therapeutic segments and susceptibility to regulatory changes, including price revisions under the drug price control order.

 

Revenue grew 9% on-year to Rs 12,668 crore in fiscal 2024, wherein the domestic market and export market revenue rose 5% and 16% respectively. While domestic market sales were largely led by price growth, sales to the US market (contributed 22% of revenue in fiscal 2024) increased by 10%, supported by new launches. The company also continues to increase its presence in the rest-of-world markets (contributing 11-12% of revenue), with focus on expanding geographical reach and capitalising growing opportunities in the semi-regulated markets. Going forward, revenue is expected to grow 8-10% annually, supported by steady revenue growth across geographies, backed by price hikes undertaken across the product portfolio, Volume growth across portfolio and maintaining leadership position in key therapeutic areas as well as abating pricing pressure on generic drugs in the US market. Operating margin improved to 17.7% in fiscal 2024 as against a one-off down in the previous fiscal on account of declining input costs, operational efficiencies, change in product mix and new launches. Going forward, with stable input costs, continued focus on cost optimisation and improving share in chronic therapies, the operating margin may improve to 18-19% over the medium-term.

 

The financial risk profile is strong, with adjusted gearing of 0.12 time as on March 31, 2024. Long-term debt was Rs 40 crore and working capital utilisation was also lower as on March 31, 2024, as the company brought down its inventory back to pre-pandemic levels. Gearing is expected to remain below 0.1 time over the medium term. While capital expenditure (capex) requirement in fiscal 2025 should remain elevated at Rs 800 crore, it is expected to be prudently funded. The company could look at some acquisitions in the domestic market going forward, of which its funding and integration with existing portfolio will be a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Alkem and its 27 subsidiaries and step-down subsidiaries. This is because all these entities, collectively referred to as Alkem, have significant operational linkages and a common management.

 

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 domestic market: Alkem ranks fifth as per the IQVIA Moving Average Total [MAT], March 2024 (source: Company Annual Report), in the domestic formulations market, with a strong position in acute therapies. The company has maintained its leading rank in anti-infective therapy and is among the top-three players in gastrointestinal, vitamins/minerals/nutrients and pain/analgesics therapies. Its leading brand, Clavam, is the second-largest selling brand in the molecule category (as per IQVIA MAT March 2024). Alkem has other leading brands, Pan, Pan-D, A to Z NS, Xone and Taxim-O, among the six brands that feature in the top 100 revenue-generating brands in India.

 

• Strong financial risk profile: Adjusted gearing stood at 0.12 time as on March 31, 2024 (0.15 time a year earlier). Long-term debt remained nil and working capital utilisation was also lower as on March 31, 2024, as the company brought down its inventory back to pre-pandemic levels of 90-100 days. Gross current assets were ~250 days as on March 31, 2024, driven by receivables and inventory of 66 and 94 days, respectively. Capex requirement of Rs 860 crore in fiscal 2025 is expected to be prudently funded. Additionally, the company could look at some  acquisitions in the domestic market going forward. The financial risk profile should remain strong over the medium term, supported by expected gearing of below 0.2 time and steady cash flow.

 

Weaknesses:

• High dependence on the acute therapeutic segment and the domestic market: Sales in the domestic market formed ~68% of the overall revenue for Alkem in fiscal 2024. Also, a sizeable proportion of this revenue (over 80% in fiscal 2024) is derived from the slow-growing acute therapeutic segment, such as anti-infectives and pain/analgesics. This exposes the company to pricing pressure amid intense competition, with about 30% of the products under price control. In recent years, Alkem has ventured into the fast-growing cardiovascular, neuropsychiatry and oncology segments. The company has about 12,000 sales representatives, of which about 15% are in the chronic segment. Although Alkem has created separate divisions to focus on the chronic therapeutic segment, contribution from the acute segment may continue to be significant over the medium term. Revenue diversification into the chronic segment in the domestic as well as international markets will remain a key monitorable.

 

• Exposure to risks related to regulatory changes: The company is susceptible to regulatory changes in the Indian and global markets. Addition to list of drugs covered under national list of essential medicines affect product pricing and, hence, profitability, though the extent of impact may differ. In the international market, regulatory risks are manifested by increasing scrutiny and inspections by the United States Food and Drug Administration (USFDA), European Medical Agency and Therapeutic Goods Administration, Australia. As on date, none of the company’s facilities have any outstanding observations from the USFDA. Continued regulatory compliance and product launches would be critical for revenue growth and will remain a key monitorable.

Liquidity: Strong

Cash accrual, expected at over Rs 1,300 crore per annum, should be sufficient to cover capex of ~Rs 800 crore in fiscal 2025 in the absence of any debt obligation over the next few years. Liquidity is also supported by unencumbered cash surplus of Rs 3,656 crore as on March 31, 2024 (excluding real estate investment).

Outlook: Stable

The business risk profile of Alkem will remain stable over the medium term, led by its established market position in the domestic market. Healthy cash generation and prudent capital spending will help sustain healthy financial risk profile over the medium term.

Rating sensitivity factors

Upward factors:

• Revenue growth of double digit, with increased revenue contribution from the international market
• Strong and sustained improvement in the operating margin, led by higher share of chronic therapies in the domestic market
• Stable financial risk profile, backed by efficient working capital management

 

Downward factors:

• Operating margin dropping below 13% on a sustained basis
• Subdued revenue growth because of high competition or downward price revisions
• Larger-than-expected debt-funded capex or acquisition

About the Company

Incorporated in 1973 and promoted by the late Mr Samprada Singh and Mr Basudeo N Singh, Alkem is among the top 10 players in formulations market in India. It is present in various therapeutic segments, including antibiotics, non-steroidal anti-inflammatory drugs, gastroenterology and antioxidants. The company is also present in chronic segments, such as neuropsychiatry, cardiovascular and oncology. It exports to the US, countries in the Asia-Pacific region, Latin America, Africa and the Commonwealth of Independent States.

 

Manufacturing facilities for formulations are in Baddi, Himachal Pradesh; Indore, Madhya Pradesh; Sikkim; Daman, Pune, Maharashtra. Facilities for active pharmaceutical ingredients are in Mandva and Ankleshwar in Gujarat and in California, USA. Also, Alkem has four research and development facilities across India and the US.

 

The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on June 30, 2024, the promoters and their entities held 56.38%, mutual funds held 11.45%, individuals held 20.61 and the remaining was held by others.

 

In the first quarter of fiscal 2025, the company reported revenue of Rs 3,032 crore (Rs 2,967 crore in the corresponding period of fiscal 2024) and net profit of Rs 550 crore (Rs 287 crore).

Key financials indicators (Consolidated)

As on/For the period ended March 31		2024	2023
Operating income	Rs.Crore	12,686	11,612
Adjusted PAT*	Rs.Crore	1,811	1,007
Adjusted PAT margin	%	14.3	8.7
Adjusted debt/adjusted networth	Times	0.12	0.15
Adjusted interest coverage	Times	22.7	16.7

*Adjusted for amortisation of intangibles and goodwill

Any other information: Not Applicable