Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position and extensive experience of the promoters in the API industry: The promoters have extensive experience of over three decades in the API industry. Their experience has helped HFL to establish itself as a large, organised player in bulk drugs industry and establish strong relationships with customers and suppliers. Over the years, it has developed more than 45 products catering to different therapeutic segments such as anesthetic, anti-diabetic, anti-gout, anti-chlonergic and anti-xiolytic among others. HFL has a dominant position in key product segments, driven by large, dedicated product capacities for allopurinol and metformin. It is one of the largest manufacturers of allopurinol. It has also diversified into contract manufacturing for formulations.

Diversified customer base: Serving wide geographies have helped expand sales to customers across 35 countries. Its reputed clientele includes Cadila Pharmaceuticals Ltd., Intas Pharmaceuticals Ltd., Dr. Reddy's Laboratories Ltd. and Novartis Pharmaceuticals with top 10 customers contributed around 41% to total revenues in fiscal 2021 and more than 33% in fiscal 2022. Repeat orders from customers and steady increase in capacities, has led to revenue of Rs 765 crore in fiscal 2021 and around Rs 800 Crore in fiscal 2022 and is expected to grow 3% in fiscal 2023 and around 10% thereafter aided by capacity additions.

Healthy operating efficiencies:- Operating margin has been healthy in the range of 34-38% during the past two fiscals through 2022, with HFL benefitting from economies of scale with large capacities and continuous research and development for improving processes. It has received certification of suitability from EQDM, USFDA, Korean FDA, Health Canada and WHO-GMP.

Return on capital employed has also been healthy at around 27-28% over the past two fiscals ended 2022.

Strong financial risk profile: HFL's capital structure is strong with networth of Rs 994.57 crore as on March 31, 2022. Gearing and total outside liabilities to adjusted networth (TOLANW) ratio were also comfortable at 0.10 time and 0.24 time, respectively, as on March 31, 2022 (0.11 time and 0.27 time, respectively, a year before) on account of controlled reliance on external funds.

Debt protection measures are adequate with interest coverage and net cash accrual to adjusted debt ratios of 96.70 times and 2.53 times, respectively, in fiscal 2022 backed by healthy profitability. Despite proposed debt funded capital expenditure, financial risk profile is expected to remain strong over the medium term backed by strong accretion to reserves.

Weaknesses:

Working capital-intensive operations: Gross current assets (GCAs) were at around 169-239 days over the three fiscals ended March 31, 2022. HFL has a receivables cycle of around 3-3.5 months and maintains inventory of 2-3 months, necessitated by the lead time on imports and a diversified product basket. This leads to large working capital requirement which is met by credit from suppliers of 80-100 days, internal accruals, leading to low dependence on working capital borrowings. With increase in revenues, the incremental working capital requirements will remain high and hence its management will remain a key monitorable.

Product concentration in revenue profile and intense competition: Despite having multiple products, HFL derives 70% of the total revenue from sale of allopurinol and metformin hydrochloride. Hence, it is exposed to high product concentration risk. Any slowdown in demand for these products, due to introduction of substitutes can adversely affect the topline of HFL. The bulk drugs industry is highly competitive because of the presence of numerous domestic, as well as global players, which exerts pricing pressure on individual entities. Diversification of product basket while maintaining profitability will remain key monitorable.

Exposure to risks related to the ongoing capex: HFL is undertaking greenfield project at Amravati, Maharashtra, for setting up a facility for formulations and capacity expansions of existing products. The estimated cost of capex is around Rs. 400 crore, to be partly debt-funded and is expected to be completed in phases over the next 2-2.5 years. Timely completion of the project with no major cost overruns, and subsequent increase in revenue will be a key monitorable.

Liquidity: Strong

Bank limit utilisation is low at around ~15% percent for the past twelve months ended August 2022. Cash accrual are expected to be over Rs 250 Crore which are sufficient/insufficient against term debt obligation of approx. Rs 26 Crore for FY2023. In addition, it will be act as cushion to the liquidity of the company. Current ratio is healthy at 9.19 times on March 31, 2022. Low gearing and moderate net worth support it’s financial flexibility, and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believes that HFL will continue to benefit from its established market position, extensive experience of its promoters, and established relationships with clients and strong financial risk profile.