Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper (CP) of Alkem Laboratories Limited (Alkem). Also, rating on CP of Rs 150 crore has been withdrawn at the request from the company. The withdrawal is in line with the CRISIL Ratings policy on rating withdrawal.

 

The ratings continue to reflect the established position of the company in the domestic formulations market and its 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 11,612 crore in fiscal 2023 and 15% on-year in the first quarter of fiscal 2024, driven by revival in the export market and steady growth in the domestic market. While sales in the domestic market (contributed 70% to revenue in fiscal 2023) grew 8% in fiscal 2023, growth moderated in the first quarter of fiscal 2024 due to delayed onset of monsoon impacting demand for products under acute therapies, which contribute over 80% to the company’s domestic revenue. Sales to the US market (accounted for 22% of the revenue in fiscal 2023) grew by 8% in fiscal 2023 and 25% in the first quarter of the current fiscal, on a low base, on the back of new launches and favourable forex impact. Alkem also continued its growth momentum in exports to Rest of World markets with focus on expanding geographical reach and market penetration.

 

Revenue is expected to grow 7-9% annually over the medium term, supported by steady growth in domestic sales backed by price hikes undertaken across the product portfolio, leadership position in key therapeutic areas, and abating pricing pressure on generic drugs in the US market.

 

Operating margin declined sharply to 14.1% in fiscal 2023 on account of surge in raw materials prices, freight cost and revival in marketing and selling expenses after the pandemic. With falling input costs, continued focus on cost optimisation and savings from shutdown of manufacturing plant at St Louis (USA), margin is expected to improve to 15-17% over the medium-term.

 

Financial risk profile is strong, with adjusted gearing of 0.15 time as on March 31, 2023. The company has no long-term debt and working capital utilisation was also lower as on March 31, 2023, due to inventory going down to pre-pandemic levels. Gearing is expected to remain below 0.2 time over the medium term. Organic capital expenditure (capex) of Rs 300-350 crore annually is expected to be prudently funded through internal accrual and liquid surplus. While there are no large inorganic growth plans in the pipeline as of now, the company could look at some brand acquisitions in the domestic market over the medium term, which is also expected to be internally funded.

 

On September 14, 2023, the Income Tax department conducted a survey at a few of the company’s offices and subsidiaries, which lasted a few days. CRISIL Ratings will continue to monitor the developments in this regard.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Alkem and its 25 subsidiaries and step-down subsidiaries. This is because all these entities, collectively referred to as Alkem, have significant operational linkages and a common management. CRISIL Ratings has amortised goodwill on consolidation over five years; profit after tax (PAT) and networth have been adjusted.

 

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 the domestic market

Alkem ranks fifth as per the IQVIA Moving Average Total [MAT], March 2023 (source: Company Annual Report), in the domestic formulations market, with a strong position in acute therapies. It has maintained its leading rank in anti-infective therapy and is among the top three players in gastro-intestinal, 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 2023). Its other key brands (Pan, Pan-D, A to Z NS, Xone and Taxim-O) are among the six that feature in the top 100 revenue-generating brands in India.

 

Strong financial risk profile

Adjusted gearing stood at 0.15 time as on March 31, 2023 (0.31 time previous fiscal). Long-term debt remained nil and working capital utilisation was also lower as on March 31, 2023 as the company brought its inventory down to pre-pandemic levels of 90-100 days. Gross current assets were ~200 days as on March 31, 2023, because of receivables and inventory of 68 days and 96 days, respectively. Annual organic capex of Rs 300-350 crore is expected to be prudently funded through internal accrual. Brand acquisitions in the domestic market, if any, will also be funded internally. Financial risk profile should remain strong over the medium term, supported by expected gearing of below 0.2 time and steady cash flows. The company’s plans to liquidate its investment of about Rs 104 crore (as on March 31, 2023) in a real estate fund is contingent upon pick-up in the real estate sector and will remain a key monitorable.

 

Weakness:

High dependence on the acute therapeutic segments and the domestic market

Sales in the domestic market formed ~70% of the overall revenue in fiscal 2023. Also, a sizeable proportion of this (over 80% in fiscal 2023) is derived from the slow-growing acute therapeutics segments (such as anti-infectives and pain/analgesics), which exposes the company to pricing pressure amid intense competition as about 30% of the products are under price control. In recent years, Alkem has ventured into the fast-growing cardiovascular, neuropsychiatry and oncology segments. It has about 12,000 sales representatives, of which 15% are in the chronic segment. Although Alkem has created separate divisions to focus on the chronic therapeutic segments, contribution from the acute sector may continue to be significant over the medium term. Revenue diversification into the chronic segment in the domestic and the international markets will remain a key monitorable.

 

Exposure to regulatory changes

The company is susceptible to regulatory changes in the Indian and global markets. Additions to lists of drugs covered under national list of essential medicines (NLEM) affect product pricing and, hence, profitability, though the extent of impact may differ. Last fiscal, price ceilings were brought about for drugs covered under NLEM, thereby affecting domestic revenue growth to some extent. In the international market, regulatory risks are manifested by increasing scrutiny and inspections by the United States Food and Drug Administration (US FDA), European Medical Agency and Therapeutic Goods Administration, Australia. As on date, none of the company’s facilities has any outstanding observations from the US FDA. Continued regulatory compliance and product launches would be critical for revenue growth and will remain key monitorables.

Liquidity: Strong

Cash accrual, expected at over Rs 1,300 crore per annum, should be sufficient to cover moderate annual organic capex of Rs 300-350 crore in the absence of any debt obligation over the next few fiscals. Liquidity is also supported by unencumbered cash surplus of Rs 1,404 crore as on March 31, 2023 (excluding real estate investment). Utilisation of the sanctioned working capital limit of ~Rs 5,250 crore averaged 30% over the 12 months ended June 30, 2023. 

Outlook: Stable

Business risk profile of Alkem will remain stable over the medium term, led by its established 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

• Sustained healthy revenue growth of over 15% annually, along with increased contribution from the international market over the medium term
• Strong and sustained improvement in 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

• Decline in operating margin below 13% on a sustained basis
• Subdued revenue growth because of intense competition or downward price revisions
• Larger-than-expected debt-funded capex, acquisition, or real estate investment adversely affecting capital structure or debt protection metrics

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 the formulations market in India. It is present in various acute 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 formulations to the US, countries in the Asia-Pacific region, Latin America, Africa and the Commonwealth of Independent States. Through its subsidiary, Enzene Biosciences Ltd, Alkem is also engaged in manufacturing and sales of biosimilar drugs in India and globally.

 

Manufacturing facilities for formulations are in Baddi, Himachal Pradesh; Indore, Madhya Pradesh; Sikkim; Daman; and Pune, Maharashtra. Facilities for active pharmaceutical ingredients are in Mandva and Ankleshwar in Gujarat and in California, the 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, 2023, the promoters and their entities held 57.16%, mutual funds held 11.45%, individuals held 20.61 and the remaining was held by others.

 

In the first quarter of fiscal 2024, the company reported revenue of Rs 2,968 crore (Rs 2,576 crore in the corresponding period last fiscal) and unadjusted net profit of Rs 288 crore (Rs 131 crore).

Key Financial Indicators (Consolidated)

As on/For the period ended March 31		2023	2022
Revenue	Rs.Crore	11,612	10,643
Adjusted PAT*	Rs.Crore	1,007	1,670
Adjusted PAT margin	%	8.7	15.7
Adjusted debt/adjusted networth	Times	0.15	0.31
Adjusted interest coverage	Times	16.7	41.9

*Adjusted for amortisation of intangibles and goodwill

Any other information: Not applicable