Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities of Emcure Pharmaceuticals Ltd (Emcure) to ‘CRISIL AA-/Stable/CRISIL A1+’ from ‘CRISIL A+/Stable/CRISIL A1’.

 

The rating upgrade follows the significant improvement in Emcure’s financial risk profile supported by significant debt reduction (completed and ongoing), from proceeds of the recently completed initial public offer of fresh equity, and expected strong cash accruals, in the current fiscal. Besides, corporate guarantees amounting to Rs 459 crore provided to Avet Lifesciences Private Ltd (Avet; US entity which got demerged from Emcure in April 2021) have also been released recently, adding to improvement in the group’s financial risk profile. Additionally, Avet has also repaid the non-convertible debentures, in June 2024 that was subscribed by Zuventus Healthcare Limited (Zuventus, subsidiary of Emcure; CRISIL AA-/Stable/CRISIL A1+), amounting to Rs. 250 crore. This would further enhance the liquidity profile at a group level. These factors, and only moderate capex spend, will result in Emcure’s overall debt levels reducing sharply thereby leading to significant improvement in the credit metrices of debt/earnings before interest, tax, depreciation and amortisation (Ebitda) of 0.7-0.8 times in fiscal 2025 as against 2.03 times in fiscal 2024. With expectations of continued improvement in cash generation and prudent funding of capital expenditure, debt metrics are likely to remain at healthy levels over the medium term.

 

On July 10, 2024, Emcure successfully completed the Initial Public Offer (IPO) resulting in fresh equity issuance of Rs 800 crore (net proceeds of ~Rs 758 crore, post IPO-related expenses) which is being primarily used for debt reduction of Rs 600 crore and balance will be utilised for general corporate purposes of the company. The company has already prepaid ~Rs 575 crore of the term loans.

 

The business risk profile of Emcure continues to remain healthy with revenues, at a consolidated level, witnessing on-year growth by 11% in fiscal 2024 to Rs 6,672 crore supported by the healthy growth in its key therapy areas in the domestic formulation market. The growth is likely to remain healthy during the current fiscal supported by new product launches and sustained growth in its key therapy areas. The company remains one of the top-15 pharmaceutical companies in India with a market share of 2.78% as per AIOCD MAT (All India Organisation of Chemists & Druggists) March 2024. During fiscal 2024, the company reported operating margins of 18.7%, witnessing reduction of almost 160 bps from fiscal 2023 levels due to higher overheads. Crisil Ratings expects the business risk profile to remain healthy supported by the stable growth in revenues coupled with margins of ~20% over the near to medium term.

 

The ratings continue to factor in geographically diversified revenue stream, leadership position in the market across certain therapeutic segments, experienced management team and established research and development (R&D) capabilities. The above strengths are partially offset by the group’s working capital requirement and exposure to intensifying competition as well as 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 Emcure group, because these entities have common line of business, and inter-company transactions of sale/purchase.

 

Also, CRISIL Ratings has amortised intangible assets and goodwill on acquisition of Mantra Pharmaceuticals Inc. (Mantra) over five years; profit after tax (PAT) and net worth have been adjusted accordingly.

 

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 improvement in financial risk profile: Emcure’s financial risk profile is expected to improve significantly supported by expected debt reduction on account of the recently completed initial public offer (IPO) of fresh equity resulting in substantial improvement in the leverage position and thereon the debt coverage indicators for the company. Through this equity issuance, the company will have IPO proceeds of Rs 800 crore (net proceeds of ~Rs 758 crore, post IPO-related expenses) which is being primarily used for debt reduction of Rs 600 crore and balance will be utilised for general corporate purposes of the company. The company has already prepaid ~Rs 575 crore of the term loans and is underway of further reducing the overall debt. Also, the corporate guarantee of USD 55 million (~Rs 459 crore) which was provided by Emcure for Avet’s working capital debt, which was included in the adjusted debt of Emcure, has been released, as Avet has refinanced these facilities with fresh borrowings, without the guarantee support from Emcure. These factors, along with only moderate capex spend, are expected to result in the overall borrowings for Emcure to reduce leading to an expected improvement in the credit metrices of Debt/Ebitda at 0.7-0.8 times in fiscal 2025 as against 2.03 times in fiscal 2024. Continuing strong cash generation, debt protection metrics will continue to witness improvement over the medium term.

 

During fiscal 2024, the company has acquired Mantra Pharmaceuticals Inc., in Quebec region of Canada under Marcan Pharmaceuticals Inc (Canadian subsidiary of Emcure); engaged in sale and distribution of pharmaceutical finished formulation products; with a purpose to expand its geographical presence in the Canadian market. Marcan had raised a debt of CAD 57.08 million (~Rs 350 crore) to fund this acquisition. This outstanding debt in foreign currency will be repaid as per its scheduled repayments.

 

However, this acquisition did not materially impact its financial risk profile. That said, any sizeable debt funded acquisitions, including of brands, which can impact debt metrics will remain a monitorable.

 

• Healthy business risk profile, supported by geographic diversity in revenue: Emcure group has a diversified revenue profile, with 48% of revenue coming from domestic market in fiscal 2024 and remaining from the international markets. The group has an established market position in the domestic formulations market with a market share of 2.78% as per AIOCD MAT March 31, 2024 and had six brands in the top-300 brands in the domestic market. It continues to maintain a leading position in gynaecology, blood-related and human immunodeficiency virus (HIV) antiretroviral therapies.

 

Over the years, the group increased its presence in Europe and Canada by establishing front-end marketing networks through acquisitions of Tillomed Laboratories Limited (UK) and Marcan Pharmaceuticals Inc (Canada). Emcure group’s consolidated revenue grew by 11% in fiscal 2024.

 

• Experienced management team, accredited manufacturing facilities and established R&D capabilities: The promoter and chief executive officer, Mr Satish Mehta, is a first-generation entrepreneur with more than 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.

 

Emcure group has 13 manufacturing facilities across India, which produces a range of pharmaceutical / biopharmaceutical products in wide range of dosage forms, including oral solids, oral liquids, injectables, including complex injectables such as liposomal and lyophilized injectables, biotherapeutics and complex APIs, including chiral molecules, iron molecules and cytotoxic products. The facilities are approved/accredited by various regulatory bodies including, USFDA, UK MHRA (United Kingdom), Health Canada, EDQM (Europe), ANVISA Brazil, and are compliant with current Good Manufacturing Practices (“GMP”) certificates from regulators including Health Canada, the World Health Organization (“WHO”), the Agency for Medicinal Products and Medical Devices of Croatia (“HALMED Croatia”), the National Institute of Pharmacy and Nutrition of Hungary (“NIPN Hungary”) and the Therapeutic Goods Administration of Australia (“TGA Australia”).

 

Emcure group has five R&D facilities with 550 qualified scientists. The group’s R&D focus along with 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 biopharma business demonstrate its strong R&D capabilities.

 

Weaknesses:

• Exposure to intensifying competition and increasing legal and regulatory risks: Emcure group generates significant proportion of total sales through the regulated markets. 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, growing competition, may limit improvement in profitability. Also, owing to the nature of products, Emcure group like many of its peers is vulnerable to litigations filed by regulators among others. In addition to this, any price-control measures of the government in the branded segment may weaken the domestic formulation growth and remains a monitorable.

 

While the US business under Avet has been demerged, Emcure group can get exposed to any future litigation in the US and other markets. Any sizeable outflow towards settlement of the same remains a monitorable. However, Emcure has entered into an Indemnification Deed with Avet, whereby from the Effective Date (as defined in the Scheme of Arrangement) Avet has agreed to indemnify, defend and hold harmless the company and its directors, officers, employees, agent, representatives and shareholders, as applicable, (“Indemnified Parties”) from and against any and all the losses suffered or incurred by the Indemnified Parties, which arises out of, results from or in connection with any claim and any loss suffered by the Indemnified Party on account of breach by Avet or its subsidiaries and affiliates of any covenants, undertakings and/or obligations of the Indemnification Deed, and in relation to losses arising out of certain identified claims.

 

In March 2022, HDT Bio Corp, US-based biopharmaceutical company, filed a lawsuit against Emcure in a US court and initiated arbitration proceedings against Emcure’s subsidiary, Gennova Biopharmaceuticals Ltd (Gennova) in the London Court of International Arbitration. In these suits, HDT had claimed that Emcure and Gennova misappropriated trade secrets related to Covid-19 vaccine development and had sought USD 950 million in damages. The United States District Court has dismissed HDT’s claims against Emcure Gennova and HDT have resolved the legal disputes relating to the U.K. Arbitration, in respect of which the relevant U.K. arbitral tribunal has ordered the arbitration proceedings to be discontinued. 

 

• Working capital intensive nature of operations: Operations are working capital intensive, as reflected in gross current assets of 204 days as on March 31, 2024, driven by inventory and receivables of 84 and 102 days, respectively. The group operates in multiple geographies, has multiple plants and has a large product portfolio; hence, it needs to maintain sizeable inventory to ensure adequate supply.

Liquidity: Strong

Emcure’s term loans will be repaid through the IPO proceeds. The group will continue to generate sufficient cash accruals to cover annual debt repayment obligations in Emcure’s subsidiaries and dividend payouts. The company’s annual capex plans will be funded internally. Cash and equivalent remained healthy at Rs 234 crore as on March 31, 2024. The working capital limit was utilised at an average 81% (on a standalone level in Emcure) and at 62% (on a group level) during the period from November 2023 to March 2024.

Outlook: Stable

CRISIL Ratings believes Emcure’s business risk profile will be supported by its established market position and geographic diversity. The financial risk profile will continue to improve backed by healthy cash generation and gradual debt reduction, and prudent funding of its capex plans.

Rating Sensitivity Factors

Upward factors:

• Healthy revenue growth, with improving operating profitability of over 21-22%, resulting in strong cash generation.
• Improved working capital management and strong debt reduction, aiding in further reduction in debt levels, and benefitting debt metrics

 

Downward factors:

• Sluggish business performance and sustained decline in operating profitability impacting cash generation.
• Stretch in working capital cycle or large, debt-funded capex or acquisitions, or indirect support provided to group companies, impacting debt metrics; for instance, gross debt to ebitda increasing to over 1.5-2 times on a sustained basis.
• Sizeable outgo of funds to settle ongoing litigations, impacting debt metrics or liquidity

About the Company

Emcure was incorporated by Mr Satish Mehta in 1981; the company commenced operations in 1983 in Pune, Maharashtra. The group has 13 manufacturing facilities across India and 5 R&D centres. The manufacturing facilities can manufacture pharmaceutical and biopharmaceutical products across a wide range of dosage forms, including oral solids, oral liquids, injectables, including liposomal and lyophilized injectables, biotherapeutics and complex APIs.

 

It has presence in domestic, regulated as well as emerging markets. It enjoys the alliance of multinational corporations and has established front-end presence in several countries through its subsidiaries. It has subsidiaries in UK, Canada, Dubai, Italy, Germany, South Africa etc. It markets formulations in key chronic therapeutic segments such as anti-diabetic, cardiovascular, oncology, etc. Also, it has presence in acute segments such as anti-infectives, gastro-intestinal, pain and analgesics, etc. Key brands such as Orofer, Tenectase, Bevon, Maxtra, Metpure, Asomex and Ferium are well-established in the domestic market.

 

The company got listed on the Indian stock exchange on July 10, 2024 and the promoters hold ~78% stake in Emcure, while the rest is owned by public shareholders including Bain Capital owning ~9%. The company also successfully completed the offer for sale (OFS) and raised Rs 1,152 crore through stake sale of the promoter and promoter group, besides Bain Capital (which earlier held over 13% stake).

Key Financial Indicators (Consolidated); CRISIL Ratings adjusted numbers

As on/for the period ended March 31	Unit		2024	2023
Revenue		Rs.Crore	6,672	6,001
PAT*		Rs.Crore	411	537
PAT Margin*		%	6.2	8.9
Adjusted debt*/adjusted networth		Times	1.18	1.27
Adjusted Interest coverage		Times	5.40	5.77

*Adjusted for amortisation of intangible assets and goodwill on acquisition of Rs. 113 crore in fiscal 2024 and Rs. 25 crore in fiscal 2023

*Adjusted debt includes guaranteed debt of ~Rs 459 crore in fiscal 2024 and ~Rs 534 crore in fiscal 2023

Any other information: Not Applicable