Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities and non convertible debentures of Emcure Pharmaceuticals Limited (Emcure; part of the Emcure group). Also, CRISIL Ratings has withdrawn its rating on bank facilities aggregating to Rs.298.36 crore at the request of the company and on receipt of withdrawal documents from the lenders. The rating action is in line with the CRISIL Ratings policy on withdrawal of ratings.
The Emcure group demerged its US business into Avet Lifesciences Pvt Ltd (Avet), a promoter-owned company, with effect from April 1, 2021. While Emcure group’s reported revenue declined by 3% in fiscal 2022 because of the demerger, excluding the US business, the revenue grew by a healthy 16% year-on-year driven by high double-digit growth in the domestic and European markets. While revenue is expected to remain flat in fiscal 2023 on a high base of fiscal 2022, along with continued challenges in Canada and emerging markets, it is expected to grow 10-12% per annum over the medium-term supported by strong market position in the domestic formulations market and high growth in the biopharmaceutical and active pharmaceutical ingredients (APIs) segments. CRISIL Ratings notes that while Emcure group’s Covid-19 vaccine, Gemcovac, received emergency use authorisation in June 2022, there has been no sales of Gemcovac as the impact of pandemic waned in India, resulting in CRISIL Ratings lowering its revenue growth expectations for fiscals 2023 and 2024. With demerger of the low-margin US business, the operating margin of the Emcure group improved to 23.3% in fiscal 2022 from 20% (~24% excluding the US business) in fiscal 2021. With sustained high input cost, increased focus on research and development (R&D) in the biopharmaceuticals segment and increase in marketing spends back to pre-Covid levels, the operating margin is expected at 20-22% over the medium term.
While Avet has been demerged, Emcure has provided a corporate guarantee of USD 65 million for the former’s working capital debt, which has been included in the adjusted gross debt of the group which stood at ~Rs 2,650 crore as on March 31, 2022. With debt expected to remain high due to higher utilisation of working capital limits and moderation in operating profitability, net adjusted debt to earnings before interest, tax, depreciation and amortisation (Ebitda) is expected to moderate marginally to ~1.9 times in fiscal 2023 from 1.8 times in fiscal 2022, against an expected improvement. However, with scheduled repayments, prudent funding of capital expenditure (capex) and higher operating profit, the net adjusted debt to Ebitda should improve to less than 1.6 times in fiscal 2024. CRISIL Ratings notes that Emcure has postponed its planned initial public offering (IPO) due to unconducive market conditions and plans to re-file the draft red herring prospectus (DRHP) in fiscal 2024. Successful completion of the IPO and utilisation of proceeds to lower debt can lead to a sharp improvement in its debt metrics and will be a key monitorable.
The ratings continue to reflect the healthy business risk profile of the group, supported by geographic diversity in revenue, presence across therapeutic segments, experienced management team, established R&D capabilities and adequate financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intensifying competition and regulatory and legal risks. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Emcure and its subsidiaries, collectively referred to as the Emcure group, as these entities have similar businesses, common management and inter-company transactions of sale/purchase.
Also, CRISIL Ratings has amortised intangible assets and goodwill on acquisitions over five years; profit after tax (PAT) and networth have been adjusted accordingly. The corporate guarantee extended to Avet has been treated as debt.
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: Healthy business risk profile, supported by geographic diversity in revenue The Emcure group has a diversified revenue profile, with 50% of revenue coming from the domestic market in fiscal 2022, 19% from emerging markets, 26% from regulated markets of Canada and Europe and the remaining from other segments, including contract manufacturing for Avet. The group has an established market position in the domestic formulations market with market share of 2.85% as per AIOCD MAT December 2022 and had nine brands in the top-300 brands in the domestic market. It also has a leading position in gynaecology, blood-related and human immunodeficiency virus (HIV) antiretroviral therapies.
Over the year, the group increased its presence in Europe and Canada by establishing frontend marketing networks through acquisitions of Tillomed Laboratories Ltd (UK) and Marcan Pharmaceuticals Inc (Canada). With demerger of Avet, the group’s consolidated revenue declined by 3% in fiscal 2022 (compared with 6-8% anticipated earlier); excluding the US business, the revenue grew by a healthy 16% year-on-year supported by strong growth in domestic and European markets. With new product launches and steady demand from existing markets, Emcure is expected to register revenue growth of 10-12% over the medium term.
Improved operating profitability with successful demerger of the US business With demerger of the low-margin US business, consolidated operating margin improved to 23.3% in fiscal 2022 from 14-17% over fiscals 2018-2020. The improvement was also partly on account of better product mix, scaling up of high-margin domestic market leading to better absorption of costs and lower marketing and travelling cost amid the Covid-19 pandemic. With sustained high input cost and gradual increase in marketing spends, the operating margin is expected to moderate to 20-22% over the medium term, supported by focussed expansion in domestic markets and benefits of cost optimisation.
Experienced management team, accredited manufacturing facilities and established R&D capabilities The promoter and CEO, Mr Satish Mehta, is a first-generation entrepreneur with almost four decades of experience in the pharma sector. The second generation has been actively involved in the strategy and growth initiatives of the business for over a decade. Additionally, the group has a team of highly qualified professionals and scientists to support operations, strategy and other functions, and drive future growth.
The group has 14 manufacturing facilities across India, which produce a range of pharma/ biopharma products in varied dosage forms, including oral solids, oral liquids, injectables, biologics, vaccines and complex APIs, such as chiral molecules and cytotoxic products. The facilities are approved/accredited by various regulatory bodies including, USFDA, MHRA (United Kingdom), Health Canada, EDQM (Europe), TGA Australia, ANVISA Brazil, HALMED Croatia, and are compliant with current Good Manufacturing Practices. The group does not have plans to undertake any major debt-funded capex.
It has five R&D facilities with over 500 scientists. Its R&D focus and manufacturing skills, developed through long track record of contract manufacturing for international pharma companies, has helped establish its presence in regulated and emerging markets. Besides, its generic formulations research in complex injectables, established expertise in chiral chemistry and focus on the biopharmaceutical business demonstrate its strong R&D capabilities.
Adequate financial risk profile The financial risk profile remains adequate supported by sizeable networth. Albeit, debt protection metrics were moderate, as reflected in net adjusted debt to Ebitda ratio of 1.8 times in fiscal 2022. Interest coverage ratio was healthy at 8.1 times in fiscal 2022 owing to low cost of overseas borrowings. With debt levels expected to remain high because of higher utilisation of working capital limits and moderation in operating profitability, the net adjusted debt to Ebitda and interest coverage ratios are expected to moderate to ~1.9 times and ~6 times, respectively, in fiscal 2023. Aided by healthy cash accrual, moderate organic capex of Rs 300-350 crore annually and scheduled repayments, the key debt metrics are expected to improve in fiscal 2024; for instance, net adjusted debt to Ebitda ratio is expected to improve to less than 1.6 times in fiscal 2024. Steady improvement in debt metrics should continue over the medium term. While the group has some inorganic growth plans, any sizeable debt-funded acquisition could adversely impact debt metrics and liquidity and will remain a key monitorable.
The PE firm, Bain Capital, invested in the company in 2013 and holds13.09% stake. CRISIL Ratings understands that there is no obligation on Emcure or the promoter family to provide an exit or assured return to Bain Capital on its investment and Bain Capital will exit partly through the planned IPO.
Weaknesses: Large working capital requirement Operations are working capital intensive, as reflected in gross current assets of ~200 days as on March 31, 2022, driven by inventory and receivables of 118 and 83 days, respectively. The group operates in multiple geographies and has a large product portfolio; hence, it needs to maintain sizeable inventory to ensure adequate supply. It majorly has a tender-based business in emerging markets, wherein it extends credit of around 180 days, resulting in large receivables. Given the group’s continuously expanding geographical base and product portfolio, CRISIL Ratings believes the working capital requirement will remain large over the medium term.
Exposure to intensifying competition and increasing legal and regulatory risks Emcure group generates significant proportion of total sales through the regulated markets. While the company has demerged its US business, sales to Europe and Canada will continue to form over 25% of total sales. The generics business in the regulated markets is highly competitive and has various legal and regulatory risks. Players in the regulated generics markets are vulnerable to pricing pressure on account of entry of several cost-competitive Indian players. Furthermore, with growing competition, the group will have to make investments in R&D and brands, which may limit improvement in profitability. Also, owing to the nature of products, the group, like many of its peers, is vulnerable to litigations filed by regulators among others. In addition, price-control measures of the government in the branded segment may weaken the growth in the domestic formulations market and remains a monitorable.
While the US business has been demerged, Emcure group remains exposed to the ongoing litigation in the US and other markets. Sizeable outflow towards settlement of the same remains a monitorable. Moreover, CRISIL Ratings notes that in March 2022, HDT Bio Corp, US-based biopharmaceutical company, filed a lawsuit against Emcure in a US court and an arbitration suit against Emcure’s subsidiary Gennova Biopharmaceuticals Ltd in the London Court of International Arbitration. In these suits, HDT has claimed that Emcure and Gennova misappropriated trade secrets related to Covid-19 vaccine development and has sought USD 950 million in damages. The management of Emcure and Gennova have maintained that there is no breach of contractual obligation or provisions of law. CRISIL Ratings will continue to monitor developments in this regard and will remain in discussion with the management of Emcure and Gennova to understand the likely implications, if any. Any adverse order or sizeable financial liability arising thereof would be a key monitorable. |
Liquidity: Adequate Consolidated cash accrual expected at over Rs 700 crore in fiscal 2023 and Rs 800 crore in fiscal 2024 will comfortably cover annual debt obligation of Rs 275-325 crore. The company’s moderate annual organic capex of Rs 300-350 crore will be funded prudently through a mix of debt and cash accrual. Cash and equivalent were healthy at Rs 163 crore as on March 31, 2022 and are expected to be higher over the medium term. The sanctioned working capital limit of Rs 1,075 crore at standalone level was utilised 90% on average during the 12 months through November 2022. |
Outlook: Stable CRISIL Ratings believes Emcure’s business risk profile will remain supported by its established market position and geographic diversity. The financial risk profile should improve backed by healthy cash accrual, gradual debt reduction and prudent funding of its capex plans. |
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About the Company Emcure was incorporated by Mr Satish Mehta in 1981; the company commenced operations in 1983 through its facility in Bhosari, Pune. It manufactures a range of formulations and APIs, and markets them in over 70 countries. It has 14 manufacturing facilities across India and 5 R&D centres.
It has presence in domestic, regulated as well as emerging markets. It also engages in contract manufacturing, enjoys the alliance of multinational corporations and has established frontend presence in several countries through its subsidiaries. It has subsidiaries in Dubai, Brazil, South Africa, Singapore, Peru and Nigeria, and office in Russia. It markets formulations in key chronic and acute therapeutic segments such as cardiology, oncology, anti-HIV, anti-infective, pain management, dermatology, gynaecology and paediatrics. Key brands such as Orofer, Bevon, Maxtra, Metpure, Asomex and Ferium are well-established in the domestic market.
The promoters own 81.59% stake in Emcure, while Bain Capital holds 13.09% and the remaining is held by key employees and directors. |
Key Financial Indicators (Consolidated)
^includes US business which has been demerged with effect from April 1, 2021 *adjusted for amortisation of intangible assets of Rs 20 crore in fiscal 2022 and Rs 46 crore in fiscal 2021 | ||||||||||||||||||||||||
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Including syndicated portion from Siemens Financial Services #Yet to be placed |
Annexure - List of Entities Consolidated
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Criteria Details
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