Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of J B Chemicals and Pharmaceuticals Limited (JBCPL; a part of the JBCPL group).

 

Revenue for the group grew 33% year-on-year in the first nine months of fiscal 2023, aided by double-digit growth in its base business and healthy contribution from various brands acquired over the past 12 months. Domestic formulation sales grew 39% to Rs 1,260 crore in the first nine months of fiscal 2023, aided by healthy growth (in the mid-teens) in its base business, driven by new product launches and contribution from acquired brands. The international business reported a healthy 26% growth during the same period, backed by high growth reported in the contract manufacturing business. CRISIL Ratings expects the revenue growth to remain healthy at about 12-14% annually over the medium term, supported by ramp-up in sales of existing products and new product launches. The acquisitions of brands from Sanzyme Pvt Ltd (Sanzyme; February 2022), Azmarda brand from Novartis AG (April 2022), brands from Dr Reddy’s Laboratories (June 2022) and Razel brand from Glenmark Pharmaceuticals (December 2022) will also support the revenue growth expectation.

 

Operating margin was healthy at 22.3% in the first nine months of fiscal 2023, in line with that reported in fiscal 2022, supported by healthy product mix with increasing share of focused products, and cost optimisation measures implemented during the Covid-19 pandemic. While profitability continues to be constrained on account of higher raw material and logistics cost and revival of marketing spends as well as factoring in the non-cash ESOP cost, it is still higher than the pre-pandemic level. The operating margin should sustain at 22-23% over the medium term, aided by continued focus on cost optimization, declining logistics cost and enhanced product mix.

 

The financial risk profile remains healthy with adjusted gearing expected at  ~0.3 time as on March 31, 2023. Organic annual capital expenditure (capex) of Rs 80-100 crore will be prudently funded through internal accrual over the medium term. The group concluded series of acquisitions in 2022 and may grow through further acquisitions over the near to medium term. The group is expected to prudently fund its expansion plans through a mix of debt and internal accrual, thus maintaining the healthy financial risk profile. Any large debt-funded capex or acquisition could impact the capital structure and debt protection metrics, and hence, remains a key monitorable.

 

The ratings continue to reflect the established position of the group in the pharmaceutical industry and its healthy financial risk profile. These strengths are partially offset by susceptibility to intense competition, fluctuations in foreign exchange (forex) rates, and regulatory changes in the domestic and international markets.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of JBCPL and all its subsidiaries. This is because these entities, collectively referred to as the JBCPL group, have common management and business interests.

 

CRISIL Ratings has amortised goodwill on consolidation/acquisitions and intangibles over five years and on acquisition of portfolio of brands from Sanzyme over 10 years; profit after tax and networth are adjusted to that extent.

 

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 position in the pharmaceuticals industry

The business risk profile is supported by JBCPL group’s established market position and diversified revenue profile in the pharmaceutical industry. The domestic market contributed to 53% of consolidated revenue in the first nine months of fiscal 2023, with the rest coming from overseas. The group’s brands - Rantac, Cilacar, Metrogyl, Cilacar-T, Nicardia and Azmarda (acquired from Novartis) - featured among the top 300 brands in India, as per IQVIA MAT December 2022 data, and accounted for over 75% of the domestic formulations revenue. Furthermore, the group has a well-balanced portfolio, with acute and chronic segments each accounting for 50% of the domestic formulations revenue in fiscal 2022. With an aim to increase the contribution of the chronic segment, JBCPL undertook few acquisitions over the past 12 months in the cardiovascular segment and now has established presence in major sub-segments. In the international segment, the group operates in regulated and semi-regulated markets, with presence in the US, South Africa, Russia, among others.

 

Healthy financial risk profile 

The financial risk profile is driven by comfortable capital structure and strong debt protection metrics. With series of debt-funded acquisitions, the debt increased to Rs 571 crore as on December 31, 2022. However, adjusted gearing is expected at ~0.3 time as on March 31, 2023, and should continue to remain healthy over the medium term. Planned capex of Rs 80-100 crore towards annual maintenance would be funded internally. The JBCPL group concluded acquisitions of several brands in 2022 with total payout of Rs 1,500-1,600 crore, part of which was debt funded. It plans to continue to grow through acquisitions over the near to medium term, which is expected to be funded prudently via debt and internal accrual. Healthy profitability and lower reliance on working capital debt have kept debt protection metrics healthy, as reflected in total debt to operating profit before interest, tax, depreciation and amortisation (OPBITDA) and interest coverage ratios at over 0.8 time and 24 times, respectively, for the first nine months of fiscal 2023. Any larger-than-expected debt-funded capex or acquisition could impact the capital structure and debt protection metrics, and hence, will be a key monitorable.

 

Weaknesses:

Susceptibility to intense competition and fluctuation in forex rates

The group mainly caters to therapeutic segments such as gastro, cardiovascular, antibiotic and pain management. High concentration in the relatively slow-growing acute therapeutic segments (50% of domestic sales in fiscal 2022) exposes the group to pricing and competitive pressures in a mature market, especially since products under price control account for almost 35% of sales. The group is also susceptible to fluctuations in forex rates in semi-regulated markets.

 

Susceptibility to regulatory changes

The group remains vulnerable to regulatory changes in domestic and international markets. Addition to lists under the Drug Price Control Order impacts product pricing and, thereby, profitability of players, though the extent of the impact may vary. Increasing scrutiny and inspections by authorities such as the US Food and Drugs Administration (US FDA) and Therapeutic Goods Administration, Australia further intensifies the regulatory risk. For instance, in January 2016, JBCPL received a notification, along with several other companies, from the National Green Tribunal to shut down its active pharmaceutical ingredient (API) plant in Panoli, Gujarat. Thereafter, the Supreme Court vide its judgement of April 2020, set aside the order of the closure of the API unit, on the basis of precautionary principle and the company was directed to pay a one-time compensation of Rs 10 crore, which has been paid.

 

Sales of Rantac (largest brand of the JBCPL group) was affected in India during September-October 2019, after the US FDA raised concerns over the cancer-causing properties in ranitidine. Post clarification issued by the US FDA in November 2019, that ranitidine contains normal levels of N- Niteosodimethylamine (NDMA), sales of Rantac resumed. While JBCPL does not sell Rantac in the US, any escalation of this issue or regulatory action by the US FDA remains a key monitorable.

Liquidity: Strong

Liquidity is supported with CRISIL Ratings’ expectation of healthy cash accrual of over Rs 425 crore in fiscal 2024, which will be sufficient to meet estimated debt obligation of ~Rs 175 crore and fund the organic capex of Rs 80-100 crore. Inorganic growth plans are also likely to be funded prudently through a mix of debt and internal accrual. Cash and cash equivalent were moderate at Rs 142 crore as on December 31, 2022 and expected to remain in the range of Rs 75-100 crore on a steady-state basis. Sanctioned bank limit of Rs 282 crore was moderately utilised at ~25-30% on average during the 12 months through December 2022.

Outlook: Stable

CRISIL Ratings believes the JBCPL group’s business profile will continue to be aided by its established market position in India, improving share of revenue from regulated markets and healthy operating efficiencies. The company is also expected to sustain its healthy financial risk profile, supported by steady cash generation.

Rating Sensitivity Factors

Upward factors:

• Considerable ramp-up in scale, sustained double-digit revenue growth, along with diversification of the revenue profile and sustenance of healthy operating margin (over 22%)
• Sustenance of healthy financial risk profile and debt protection metrics, while pursuing inorganic growth

 

Downward factors:

• Sluggish revenue growth and decline in operating margin to below 15%, impacting cash generation
• Substantial debt-funded capex or acquisitions resulting in significant weakening of the debt protection metrics

About the Company

JBCPL was originally set up as JB Mody Chemicals and Pharmaceuticals Ltd, by the promoter, Mr JB Mody and his family in 1976, to manufacture APIs and formulations. The company was renamed in 1985. The manufacturing units are in Ankleshwar and Panoli (both in Gujarat), and Daman (Union Territory of Daman and Diu). The company manufactures a wide range of pharmaceutical formulation specialties, radio-diagnostics, APIs and intermediates.

 

The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2022, the promoters, that is Tau Investments Holdings PTE Ltd, held 53.95%, mutual funds held 15.62% and the balance was held by the public and others.

 

For the first nine months of fiscal 2023, the company reported profit after tax (PAT) of Rs 322 crore (reported PAT of Rs 301 crore in the corresponding period of fiscal 2022) on revenue of Rs 2,387 crore (Rs 1,800 crore).

Key Financial Indicators

As on/for the period ended March 31		2022	2021
Revenue	Rs crore	2423	2043
Adjusted PAT*	Rs crore	376	443
Adjusted PAT margin*	%	15.5	21.7
Adjusted debt/adjusted networth	Times	0.01	0.02
Interest coverage	Times	113.29	87.00

*Adjusted for goodwill and intangibles amortisation, in-line with CRISIL’s analytical approach

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	Fund-Based Facilities	NA	NA	NA	120	NA	CRISIL AA/Stable
NA	Fund-Based Facilities*	NA	NA	NA	20	NA	CRISIL AA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	11	NA	CRISIL A1+
NA	Non-Fund Based Limit@	NA	NA	NA	9	NA	CRISIL A1+
NA	Non-Fund Based Limit^	NA	NA	NA	55	NA	CRISIL A1+
NA	Term Loan	NA	NA	Apr-2025	300	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Jul-2027	60	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Dec-2028	375	NA	CRISIL AA/Stable

*Interchangeable with non-fund-based limit

@Interchangeable with cash credit, export packing credit, foreign bill purchase and working capital demand loan facilities
^includes credit exposure limit of Rs 13 crore