| Cadila Healthcare Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Cadila Healthcare Limited (Cadila Healthcare; a part of the Zydus Cadila group) to ‘Positive’ from ‘Stable’; and reaffirmed the rating at 'CRISIL AA+’; the short-term rating has been reaffirmed at ‘CRISIL A1+'. The rating on the commercial paper of Rs 1,100 crore is withdrawn as per client request and in line with CRISIL Ratings policy for withdrawal of ratings.
The outlook revision reflects improvement in Cadila Healthcare’s financial risk profile, with gross debt significantly reducing to Rs 4,653 crore as on September 30, 2021, from Rs 7,986 crore as on March 31, 2020. This was supported by fund raising through QIP (qualified institutional placement) in its wellness business and strong cash accruals. With strong liquid surplus from the sale of domestic animal healthcare business in the second quarter of fiscal 2022, net debt reduced below Rs 2,000 crore and net debt/EBITDA (earnings before interest, taxes, depreciation, and amortization) at 0.5 time as on September 30, 2021. Financial risk profile is expected to remain strong, with net debt/EBITDA sustained below 0.5-0.6 time over the medium term, supported by strong cash accruals and moderate capital expenditure (capex) as well as inorganic growth plans.
The consolidated revenue grew by 4% on-year in the first half of fiscal 2022, supported by growth in the domestic and emerging markets even as the US revenue witnessed degrowth. The US segment (accounting for 43% of revenue this fiscal) degrew by 11% in the first half of fiscal 2022 due to continued intense pricing pressure. The delayed regulatory re-inspection and closure of United States Food and Drug Administration (US FDA) warning letter at the group’s plant in Moraiya (Gujarat) restricted new product launches in the US market. The resolution of pending regulatory issues at the Moraiya plant and pick-up in new product launches resulting in strong revenue growth in the US market would remain the key monitorables.
The domestic formulations segment (accounting for 27% of revenue) is expected to witness healthy growth in fiscal 2022, given the revival in demand and lower base of previous fiscal. In August 2021, India's drug regulator granted emergency use approval for Cadila's Covid-19 vaccine, ZyCoV-D. The Covid-19 vaccine sales could provide upside to the overall domestic market sales and would remain the key monitorable.
Overall, operating margin stood at 22% in fiscal 2021 and is expected to remain healthy at 21-22% over the medium term, supported by cost control measures and ability to pass on majority of input cost increase to customers. However, large acquisition of Heinz India Pvt Ltd (HIPL) and high goodwill amortisation (CRISIL Ratings’ analytical adjustment) has constrained the return on capital employed at about 11% in fiscal 2021 and should remain about 15%, until ramp-up from consumer wellness division (accounting for 12% of total revenue) as well as resolution of warning letter and subsequent strong growth in the US market.
The ratings continue to reflect the Zydus Cadila group's established position in the branded generics market in India and the expected benefits from growth in the wellness segment post acquisition of HIPL. The ratings also factor in growing presence in international markets, particularly the US and strong financial risk profile. These strengths are partially offset by exposure to risks related to unfavourable regulatory changes, increasing competition and price erosions in the regulated generics US markets. |
Analytical Approach For arriving at the ratings of Cadila Healthcare, CRISIL Ratings has combined the business and financial risk profiles of Cadila Healthcare, and its 41 subsidiaries and step-down subsidiaries (collectively referred as the Zydus Cadila group), as all entities operate in the pharmaceutical and related space, with significant operational linkages, under a common management. For three joint ventures (JVs), CRISIL Ratings follows a moderate integration approach; specifically factoring in the share of profit from JVs and share of any incremental investment required by JVs. CRISIL Ratings has amortised goodwill consolidated on earlier acquisitions over five years and on HIPL’s acquisition over 10 years. Both profit after tax (PAT) and networth are adjusted to that extent.
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:
The Zydus Cadila group is one of the top five players in the domestic formulations market. The group is the market leader in the high-growth lifestyle segments such as gastrointestinal, cardiology, respiratory and gynaecology, which account for about 10%, 15%, 9% and 8% respectively of its domestic formulation sales. The group has strengthened its marketing team over the past couple of years, giving more thrust on market strategies such as growth in the categories, integration of channel partners, supply chain and procurement to improve revenue and cost synergies. This is reflected in better growth momentum in fiscal 2021 and is expected to sustain over the medium term, backed by its established brands, large and therapeutic-focused field force, in-licensing agreements, and product launches. It also has established presence in rest of the world markets of Brazil, Mexico and South Africa. Rest-of-the world segment (including Latin America) grew by about 16% in fiscal 2021 and 32% in first half of fiscal 2022. The company also has healthy pipeline of complex molecules and biosimilars in the domestic and emerging markets, and will be the growth drivers over the medium term. The COVID-19 vaccine sales would provide additional upside in domestic market growth and would be monitorable.
The group’s business prospects are supported by its growing presence in regulated generics markets such as the US. The group has 333 approvals and has filed 425 abbreviated new drug application (ANDAs), as on September 30, 2021. Healthy pace of filings and approvals in the US, also reflected in the strong ANDA pipeline of over 90 as of September 2021, will strengthen the US business. With formulation revenue of Rs 6,445 crore in fiscal 2021, the group is one of the top five players in the US generic market. The warning letter on the Moraiya plant and delayed regulatory reinspection and resolution has constrained the growth to an extent last fiscal. The resolution of pending regulatory issues at Moraiya plant and pick-up in new product launches thereby resulting in strong revenue growth in the US market would remain a key monitorable.
Financial risk profile is marked by healthy capital structure and debt protection metrics. Adjusted gearing and net debt/ EBITDA improved sharply to 0.3 time and 0.5 times, respectively, as on September 30, 2021, due to debt reduction with fund raising through QIP in it’s the wellness business, funds raised through sale of domestic animal health business and strong cash accrual. Liquidity was healthy at Rs 3,640 crore as on September 30, 2021 on the back of sale of the animal healthcare business, which provides cushion to financial metrics. The interest coverage ratio will remain over 20 times going forward. The financial risk profile is expected to remain strong, with net debt/EBITDA below 0.5-0.6 times over the medium term, after factoring in moderate capex and inorganic growth plans. Any material debt-funded acquisition or investment in group companies could adversely impact the company’s capital structure and liquidity and would remain the key monitorables.
Weaknesses:
The Zydus Cadila group remains exposed to regulatory risks, both in domestic and international markets, particularly the US. For instance, in October 2019, warning letter was issued for the Moraiya plant. Though the company has prior experience of remediation of warning letter as in fiscal 2017, timely remediation of the outstanding warning letter will be critical for the future US growth momentum. The ongoing litigation by the anti-trust division of US Department of Justice on industry generic players regarding price-collusion allegations remains a monitorable. Further, any price-control measures of the government in the branded segment may weaken the domestic formulation growth.
The Zydus Cadila group faces intense competition in regulated markets, where innovator companies engage in aggressive defence tactics by launching authorised generics, and there are several cost-competitive Indian players present. Furthermore, generics players in regulated markets are affected by severe price erosions as witnessed this fiscal, given the commoditised nature of products, along with intense competition and considerable government pressure to lower prices. Strong bargaining power of distributors in the US, leads to large working capital requirement. The group’s gross current assets have remained high at around 203 days as on March 31, 2021. Ample liquidity and high financial flexibility is expected to meet the incremental working capital requirement. |
Liquidity: Strong Cash accrual is expected to be over Rs 3,000 crore annually, and will be more than sufficient to meet moderate term debt obligation of about Rs 900 crore annually. Sizeable cash and cash equivalents (including investments in mutual funds) of nearly Rs 3,640 crore as on September 30, 2021, also support liquidity. Besides, the company has fund-based bank limit, which remains moderately utilised at about 38% for the 12 months period ending October 2021. Cash accrual will be sufficient to meet annual capex requirement of Rs 700-800 crore annually and also fund expected inorganic growth plans of Rs. 750-1000 crore annually. |
Outlook: Positive Cadila Healthcare will maintain a diversified revenue profile across geographies and healthy cash accrual over the medium term. The financial risk profile is expected to remain strong with healthy capital structure and significant improvement in operating performance and debt protection metrics. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Cadila Laboratories was founded in 1952 by Mr Raman Patel and Mr Indravadan Modi. Cadila Healthcare was incorporated in 1995 following the split of Cadila Laboratories, with Mr Modi and his family's share being moved into a new company called Cadila Pharmaceuticals Ltd. The division that was managed by Mr Raman Patel’s son, Mr Pankaj Patel, was renamed Cadila Healthcare, and the group was named the Zydus Cadila group. In 2000, Cadila Healthcare got listed on the Bombay Stock Exchange. Over the years, the company has grown to become one of the top five pharmaceutical companies in India. It also has growing presence in the regulated markets, particularly the US and is one of the top 10 players in the US generic market. Other segments include emerging markets formulations, consumer wellness, animal healthcare and bulk drugs.
As on September 30, 2021, the promoters held 74.88% stake in Cadila Healthcare, 4.11% held by foreign portfolio investors and the balance was held by the public and others. |
Key Financial Indicators
*Adjusted for goodwill and intangibles amortisation |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Interchangeable with bank guarantee and letter of credit facility *Interchangeable with letter of credit facility @ Not placed |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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^Interchangeable with bank guarantee and letter of credit facility
*Interchangeable with letter of credit facility
This Annexure has been updated on 30-Nov-2021 in line with the lender-wise facility details as on 06-Sep-2021 received from the rated entity.
Criteria Details
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