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; part of the JBCPL group).

 

On December 19, 2023, JBCPL’s board approved execution of a trademark license agreement (TLA) with Novartis Innovative Therapies AG, Switzerland (Novartis Switzerland), for a portfolio of select ophthalmology brands. Effective January 2027, the TLA will be perpetual in nature and will permit exclusive rights to these brands in the Indian market. The board has also approved execution of a promotion and distribution agreement (PDA) with Novartis Healthcare Pvt Ltd, India (Novartis India), for the brands for three years beginning December 2023. As part of this transaction, JBCPL will pay Rs 125 crore to Novartis India for the PDA while a cash consideration of USD 116 million will be paid to Novartis Switzerland for the TLA on or before December 31, 2026. The payouts are expected to be funded through available cash surplus and internal accrual.

 

Through this transaction, CRISIL Ratings notes the expected improvement in the company’s business risk profile, through improved diversification in the pharmaceuticals business in India, fostering healthy growth in revenue and sustained improvement in operating performance. Furthermore, CRISIL Ratings does not envisage any material impact on the credit profile of JBCPL as this transaction is expected to be funded through internal accrual. CRISIL Ratings also takes comfort from the healthy track record of the company in prudently managing its capital structure and successfully leveraging its past acquisitions.

 

The revenue grew by 12% on-year in the first half of fiscal 2024 to Rs 1,778 crore, aided by growth in its base business and healthy contribution from various brands acquired over the past 12 months. Domestic formulation sales grew 14% on year to Rs 970 crore, while the international business reported a healthy 9% growth. Revenue growth is expected to remain healthy at 11-12% in fiscal 2024 and 15-18% per annum over the medium term, supported by ramp-up in sales of existing products and new product launches. The company’s acquisition of brands from Sanzyme Pvt Ltd (Sanzyme; February 2022), Azmarda brand from Novartis AG (April 2022), Dr Reddy’s Laboratories (June 2022) and Razel brand from Glenmark Pharmaceuticals (December 2022) has supported revenue growth. Operating margin was healthy at 26.7% in the first half of fiscal 2024, as against 22.4% in the first half of fiscal 2023, supported by healthy product mix with increasing share of focused products and cost optimisation measures. The operating margin is expected to remain healthy at 24-25% over the medium term with better product mix and healthy revenue growth through margin-accretive acquisitions.

 

The financial risk profile was healthy, as reflected in adjusted gearing of 0.24 time as on March 31, 2023. While the company will continue to invest in organic annual capital expenditure (capex) of Rs 75-100 crore, the capex is likely to be prudently funded through internal accrual over the medium term. The JBCPL group concluded a series of acquisitions in 2022 and may grow through further acquisitions over the medium term. It will prudently fund its expansion plans through internal accrual, maintaining a healthy capital structure and financial risk profile. Any large, debt-funded capex or acquisition could impact the capital structure and debt protection metrics, and hence, remain a key monitorable.

 

The ratings continue to reflect the established position of the group in the pharmaceutical sector 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 domestic and international markets. 

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of JBCPL and 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 and Novartis over 10 years and three years, respectively; 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 the group’s established market position and diversified revenue profile in the pharmaceutical industry. The domestic market contributed 53% of revenue in fiscal 2023, with the balance coming from international markets. The 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 2023 data, and accounted for over 75% of the domestic formulation 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 2023. To increase the contribution of the chronic segment, it undertook a few acquisitions over the past 12 months in the cardiovascular segment and now has an 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, and Russia, among others.

 

Healthy financial risk profile 

Adjusted gearing is expected at 0.2 time as on March 31, 2024, and will remain healthy over the medium term. Outstanding debt reduced to Rs 445 crore as on September 30, 2023, from Rs 548 crore as on March 31, 2023. Planned organic capex of Rs 75-100 crore towards annual maintenance will be funded internally. In addition, the near-term inorganic capex plans will be funded through internal accrual. Healthy profitability and low reliance on debt have kept the debt protection metrics healthy, as reflected in total debt to operating profit before interest, tax, depreciation and amortisation and interest coverage ratios over 0.2 time and 22 times, respectively, in the first half of fiscal 2024. Any large, 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 revenue concentration in the relatively slow-growing acute therapeutic segments exposes the group to pricing and competitive pressures in a mature market, especially since products under price control account for 35% of sales. The group is also susceptible to fluctuations in forex rates in semi-regulated markets.

 

Exposure to regulatory risks

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 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 through its judgement of April 2020 set aside the order of closure of the API unit on the basis of precautionary principle and the company was directed to pay one-time compensation of Rs 10 crore, which has been paid.

 

Sales of Rantac (largest brand of the group) were 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

Expected cash accrual over Rs 500 crore in fiscal 2024 and Rs 550-700 crore over the next two fiscals will sufficiently cover debt obligation of ~Rs 160 crore and capex of Rs 75-100 crore in the near term. Inorganic growth plans are likely to be funded prudently through a mix of debt and internal accrual. Cash and equivalent was moderate at Rs 393 crore as on September 30, 2023, and is expected to remain in the range of Rs 75-100 crore.

Outlook: Stable

CRISIL Ratings believes the JBCPL group will continue to benefit from its established market position in India, improving revenue from regulated markets and healthy operating efficiency. Also, the group is expected to sustain its healthy financial risk profile, supported by steady cash generation.

Rating Sensitivity Factors

Upward factors:

• Considerable ramp-up in revenue, along with diversification of the revenue profile, and stable 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 below 15% leading to lower cash accrual
• Large, debt-funded capex or acquisitions weakening the debt protection metrics

About the Company

JBCPL was set up in 1976 as JB Mody Chemicals and Pharmaceuticals Ltd by Mr JB Mody and his family members to manufacture APIs and formulations. The company was renamed in 1985. Its manufacturing units are at Ankleshwar and Panoli in Gujarat, and at Daman in Union Territory of Daman and Diu. The company manufactures a wide range of pharmaceutical formulation specialties, radio-diagnostics, APIs, and intermediates. It is listed on the Bombay Stock Exchange and the National Stock Exchange.

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs crore	3,149	2,423
Adjusted profit after tax (APAT)	Rs crore	347	376
APAT margin	%	11.0	15.5
Adjusted debt/adjusted networth*	Times	0.24	0.01
Interest coverage	Times	19.49	113.29

*Adjusted for goodwill and intangibles amortisation, in line with the CRISIL Ratings 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