Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable/CRISIL A2+’ ratings on the bank facilities of Charak Pharma Pvt Ltd (Charak Pharma; part of the Charak group).

 

The ratings continue to reflect the steady business risk profile of the Charak group, backed by revenue growth, established market position in the ayurvedic prescription drugs segment and its comfortable financial risk profile. These strengths are partially offset by exposure to intense competition within the ayurvedic drugs segment, and from established allopathic formulations.

 

Revenue grew by 4% to Rs 178 crore in fiscal 2021, led by increased offtake from the export segment (Rs 23 crore in fiscal 2021, vis-à-vis Rs 14 crore in fiscal 2020) and pick up in prescription-based sales during the later part of the year post easing of pandemic related restrictions. Revenue growth momentum intensified in the current fiscal with company recording Rs 106 crore in the first six months of fiscal 2022, compared to Rs 84 crore recorded during the corresponding period of the previous fiscal. Going forward, revenue is projected to grow by 7-8% over the medium term, driven by increase in share of exports and steady demand from prescription-based sales.

 

Operating margins were at historical highs of 17.5% for fiscal 2021 (8.1 % in fiscal 2020), aided by a drop in administrative and marketing expenses. However, with return of normalcy and rollback of certain administrative and discretionary spend cuts, margins moderated to 20.3% for the first half of fiscal 2022 as against 23% recorded during  the corresponding period of the previous fiscal. Margins are typically much higher during the first half of the fiscal as around 55% of revenues are booked in the first half of the year whereas large portion of commission and incentive expenses are booked only in the fourth quarter.  For the full year, margins should sustain at 10-12% over the near to the medium term.

 

Vedistry, which was incorporated as a 50:50 joint venture between Charak  Pharma and the Bennett Coleman Group (BCCL), has now become a direct subsidiary of the former, which holds a 95.15% stake. The agreement under which BCCL was to infuse Rs 250 crore as a line of credit to be consumed as advertisement over a five-year period (to cover advertising and promotional expenses) and hold a 50% stake, stands redrawn limiting the line of credit to Rs.48 crore as on March 31, 2021. Till date, BCCL has brought in Rs 48 crore via equity and line of credit , all of which would be converted into equity during the year, for its 4.85% stake.

 

Capital structure is likely to be comfortable, marked by negligible gearing and absence of any debt-funded capital expenditure (capex). The company currently has investments of Rs 14.25 crore as on March 31, 2021 in Vedistry. Incremental investment of Rs 3-4 crore per fiscal  in Vedistry is expected going forward.

 

High dividend of Rs 26 crore was declared in fiscal 2020, owing to changes in taxation norms for dividend pay outs. However, this was a one-off instance and dividend pay-outs have normalised to historical levels (about 50% of PAT). Any higher dividend outflow would remain a key monitorable.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Charak Pharma, its wholly-owned subsidiary, Charak Healthcare Pvt Ltd, and associate concern, Ayurveda Agencies. This is because all the entities, collectively referred to as the Charak group, have common promoters and significant operational linkages. CRISIL Ratings had earlier followed a moderate integration approach for Vedistry Pvt Ltd, wherein share of profit from JVs and any incremental investment required by JVs was factored in. With Vedistry becoming a subsidiary of Charak, the full consolidation approach would be followed from fiscal 2022.

 

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: Top selling brands of the group include M2Tone (to treat hormonal and infertility problems in women), Livomyn (hepatitis and liver problems), Manoll (fatigue and anaemia), and Addyzoa (male infertility problems) in the respective segments. Hence, revenue growth of 8-9% is likely to sustain, aided by promotional activities and clinical trials to improve prescription.

 

• Comfortable financial risk profile: Gearing was low at 0.32 time as on March 31, 2021, aided by nominal short-term debt and nil long-term debt. Debt protection metrics are robust with interest coverage and net cash accrual to total debt ratios of 21.5 and 2.84 times, respectively, in fiscal 2021. Capital structure should remain comfortable, aided by nominal incremental group investment and no debt-funded capex. The group follows a policy of paying about 50% of net profit as dividend (excluding dividend tax), which constrains the networth. However, networth has improved on a consolidated basis, owing to profit accretion from Charak and equity infusion of 48 crore by BCCL in Vedistry.

 

Weaknesses

• Susceptibility to intense competition: Players in the ayurvedic industry face stiff competition from the large unorganised segment, and also from allopathic drugs. Furthermore, growing popularity of herbal and natural products has encouraged large fast-moving consumer goods (FMCG) players to enter the business, particularly in the neutraceutical and over-the-counter segments. Resultantly, sizeable expenditure on sales, brand building and marketing, and limited pricing flexibility on the other hand, constrain profitability. Operating margin was subdued at 8-9% over the three fiscals through March 2020, also due to destocking, post implementation of the goods & services tax (GST).

 

• Limited acceptance for ayurvedic drugs constraining size and growth of industry: Regulations for the ayurvedic industry are still evolving, with respect to quality control, clinical trials and standardisation of manufacturing procedures. Also, as ayurvedic medicines are regarded as traditional medicines, they are not as readily accepted like allopathic formulations.

Liquidity: Adequate

The group is likely to generate cash accrual of Rs 10 crore per fiscal over the medium term, against low capex of Rs 1-2 crore and nil long term debt. Bank limit of Rs 18 crore was utilised at 15.2% on an average, over the 12 months through November 2021. Cash and bank balance of Rs 18 crore provides an additional cushion. Also, capex and group investments should be moderate over the medium term. Large dividend payout of 50% of net profit may constrain accretion to liquid reserves. Working capital requirement is moderate with receivables and inventory at 22 and 62 days, respectively as on March 31, 2021.

Outlook Stable

CRISIL Ratings believes the Charak group will maintain its revenue growth and healthy financial risk profile, supported by stable cash accrual and an adequate capital structure.

Rating Sensitivity factors

Upward factors:

• Significant revenue growth and stable operating margin of 12-14%, resulting in improved cash accrual
• Sustained increase in networth with regular accretion of profit; stabilisation of Vedistry business, resulting in positive contribution to overall profit

 

Downward factors:

• Large, debt-funded capex or group investments, leading to moderation in credit metrics
• Sustained slowdown in revenue growth
• Decline in operating margin to below 8%
• Substantial dividend outflow in turn constraining networth
• Higher-than-expected losses in Vedistry, requiring more-than-expected support

About the Group

The Charak group was set up by Mr DN Shroff and Dr SN Shroff in 1947, and is now managed by the third generation of the Shroff family - Mr Vikram K. Shroff, Mr Nimish K Shroff, Mr Pulin H Shroff, Dr Ram H Shroff and Mr. Raj H Shroff. Charak Pharma manufactures ayurvedic formulations, and has a strong presence in the gynaecology, gastro-intestinal, sex stimulant, rejuvenator, infertility, and stomatological segments. It offers products in more than 70 categories and is present in the pharma, Phytonova, Phytocare, institutional sales, OTC, healthcare, veterinary, and export divisions.

 

Ayurveda Agencies: The firm is held by an associate company where the Shroff family are shareholders. It markets Charak Pharma products to doctors through medical representatives who are engaged on commission basis.

 

Charak Healthcare Pvt. Ltd.: Retail wellness business has been transferred in this company from Aug. 2012. At present the business is run on the own and franchise model, but in the medium to long term management plans to grow this business... The  OTC segments have been moved to its subsidiary, Charak Herbal Care, which was incorporated in fiscal 2017.

 

Vedistry Private Limited (earlier known as Charak Herbal Care Private Limited): In this 50% has been held by Charak and the balance by BCCL (Bennett, Coleman and Company Limited). The part was sold to BCCL for consideration worth Rs 50,000 mainly for the purpose of promoting the products through advertisements. This agreement is signed for a period of 5 years in which all the operating expenses worth Rs 25 crore would be borne by Charak Pharma and advertisements aggregating to Rs 250 crore by BCCL. However, the current update is that the contract with BCCL now stands redrawn as of March 31, 2021. Till date BCCL has brought in Rs. 48 crore as a combination of equity and a line of credit towards advertisement  all of which would be converted into equity during the year for its 4.85% stake

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with Outlook
NA	Bank guarantee	NA	NA	NA	1.00	NA	CRISIL A2+
NA	Cash credit*	NA	NA	NA	18.00	NA	CRISIL A-/Stable

*Interchangeable with Working Capital Demand Loan