| Cadila Healthcare Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the bank facilities and debt programmes of Cadila Healthcare Limited (Cadila Healthcare; a part of the Zydus Cadila group) at 'CRISIL AA+/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at its ratings of Cadila Healthcare, CRISIL has combined the business and financial risk profiles of Cadila Healthcare and its 40 subsidiaries and step-down subsidiaries (referred to as the Zydus Cadila group) as all these entities operate in the pharmaceutical and related space, with significant operational linkages and a common management. For equal joint ventures (JVs), CRISIL follows a moderate integration approach; specifically, CRISIL factors in share of profit from JVs and share of any incremental investments required by JVs. CRISIL 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position The Zydus Cadila group is the fourth-largest player in the domestic formulations market. It is the leader in the high-growth lifestyle segments such as gastrointestinal, cardiology, respiratory and gynaecology, which account for about 11%, 15%, 11% and 8%, respectively, of its domestic formulation sales. In fiscal 2019, the group strengthened its marketing team by giving more thrust on 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 2020, which is expected to sustain over the medium term on the back of established brands, large and therapeutic-focused field force, in-licensing agreements, and product launches. The group also has established presence in Rest of World markets of Brazil, Mexico and South Africa. This segment (including Latin America) grew by about 49% in fiscal 2020, on a lower base. The company also has a healthy pipeline of complex molecules and biosimilars in the domestic and emerging markets, and will be the growth driver over the medium term. * Growing presence in the regulated generics markets Business prospects are supported by increasing presence in the regulated generics markets such as the US. The group now has 282 approvals and filed 390 abbreviated new drug application (ANDAs), as on March 31, 2020. Healthy pace of filings and approvals in the US, also reflected in the strong ANDA pipeline of over 100 as of March 2020, will strengthen the US business. With formulation revenue of Rs 5,920 crore in fiscal 2020, the group is one of the top 10 players in the US generic market. The warning letter on Moraiya will constrain growth to an extent in the near term, as 8-10 ANDA approvals may be impacted until the remediation and re-inspection is complete; resolution remains a key monitorable. * Healthy financial risk profile Adjusted gearing and net gearing (net of cash) stood at 0.84 time and 0.71 time, respectively, as on March 31, 2020, and the adjusted gearing is expected at 0.60-0.70 time over the medium term. interest coverage ratio will remain at 8-9 times, despite the debt-funded acquisition; however, benefits from the acquisition of HIPL are expected to accrue only over the medium term - in the interim, debt/EBITDA ratio increased to 2.87 times in fiscal 2020 and is expected to correct to around 2 times over the medium term. Any material debt-funded acquisition or investment in group companies will be a key rating monitorable. Weaknesses: * Exposure to risks related to unfavourable regulatory changes The Zydus Cadila group remains exposed to regulatory risks, both in the domestic and international markets (particularly the US). For instance, in October 2019, a 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. Furthermore, any price-control measures of the Government of India in the branded segment may weaken the domestic formulation growth. * Exposure to intense competition, volatility in foreign exchange (forex) rates, and stretch in working capital cycle The group faces high 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, 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. Gross current assets remained high at around 230 days as on March 31, 2020. Ample liquidity and high financial flexibility are expected to meet the incremental working capital requirement. |
| Liquidity Strong |
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Cash accrual is expected to be over Rs 1,700 crore annually in fiscals 2021 and 2022, and will be sufficient to meet moderate term debt obligation of about Rs 800 crore and 1,000 crore, respectively. Sizeable cash and cash equivalents (including investments in mutual funds) of nearly Rs 1,200 crore as on March 31, 2020, also support liquidity. Besides, the company (standalone) has fund-based bank limit which remained moderately utilised at about 35% for the 12 months period ending March 2020. Cash accrual will be sufficient to meet annual capex of Rs 600-700 crore. |
| Outlook: Stable |
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CRISIL believes Cadila Healthcare will maintain a diversified revenue profile across geographies and healthy cash accrual, over the medium term. Financial risk profile is expected to remain strong, with moderate capital expenditure (capex) and gradually improving credit metrics. |
| Rating Sensitivity factors |
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Upward factors * Healthy sustained compound annual growth rate of 13-15% in turnover, with increased revenue contribution from the US market following the remediation of warning letter issued by the US Food and Drug Administration (US FDA) or better-than-expected contribution from other manufacturing units * Sustenance of healthy operating margin at 18-19% supporting adequate cash generation * Gross debt/EBIDTA of below 2.00 times from about 3.00 times in fiscal 2020 Downward factors * Decline in profitability to below 15-16% due to delay in closure of warning letter, increased competition, or weaker-than-expected improvement in HIPL's operations * Slower-than-anticipated recovery in credit metrics; gross debt/EBITDA increasing to over 3.6-3.8 times owing to lower cash generation, sizeable, debt-funded acquisitions, capital spending, or substantial stretch in working capital cycle |
| About the Company |
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Cadila Laboratories was founded in 1952 by Mr Ramanbhai Patel and Mr Indravadan Modi. Cadila Healthcare came into existence in 1995 following the split of Cadila Laboratories, with the Modi family's share being moved into a new company, Cadila Pharmaceuticals Ltd. The division that was managed by Mr Ramanbhai 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 entities 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. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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