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 by 19% year-on-year in fiscal 2022, aided by healthy growth in the domestic formulations segment. The domestic formulation sales grew by 32% to Rs 1,173 crore in fiscal 2022, aided by sustained growth in the key therapeutic segment and new product launches. The export formulations business on the other hand, recorded moderate growth of 9% in fiscal 2022, backed by steady performance of the contract manufacturing business and the South African market. Revenue growth is expected to remain healthy at about 15% annually over the medium term, supported by ramp-up in sales of existing products and new product launches. The recently concluded acquisitions of brands from Sanzyme Pvt Ltd (Sanzyme) (February 2022), Azmarda brand from Novartis AG (April 2022) and brands from Dr Reddy’s Laboratories (June 2022) will also contribute to revenue growth in the near to medium term.

 

Operating margin was healthy at 22.4% in fiscal 2022, driven by an improved product mix with increasing share of focused products, and cost optimisation measures implemented during the pandemic. While profitability in fiscal 2022 was lower than previous fiscal, owing to higher raw material and logistics cost and revival of marketing spends as well as factoring in the non-cash ESOP cost, it was still higher than the pre-pandemic level. The operating margin should sustain at 22-24% over the medium term, aided by continued focus on cost optimisation and an enhanced product mix.

 

Financial risk profile remains healthy, with adjusted gearing of 0.01 time as on March 31, 2022. Organic annual capital expenditure (capex) of Rs 70-90 crore will be prudently funded through internal accrual over the medium term. The group concluded few acquisitions in 2022 so far, 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 herein as the JBCPL group, have common management and business interests.

 

CRISIL Ratings has amortised goodwill on consolidation and intangibles over five years and on acquisition of portfolio of brands from Sanzyme Pvt Ltd 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

Business risk profile is marked by an established market position and diversified revenue profile in the pharmaceutical industry. The domestic market contributed to 48% of consolidated revenue in fiscal 2022, with the rest coming from overseas. The group’s brands - Rantac, Cilacar, Metrogyl, Cilacar-T and Nicardia - feature among the top 300 brands in India, as per IQVIA MAT March 2022 data, and accounted for over 80% of the domestic formulations revenue. Further, the group has a well-balanced portfolio, with acute and chronic segments each accounting for 50% of the domestic formulations revenue in fiscal 2022. In the international segment, the group operates in regulated and semi-regulated markets, with presence in the US, South Africa, Russia, etc.

 

Healthy financial risk profile 

Financial risk profile is driven by a healthy capital structure and strong debt protection metrics. Adjusted gearing remained healthy at 0.01 time as on March 31, 2022 and expected to remain healthy over the medium term. Planned capex of Rs 70-90 crore towards annual maintenance would be funded internally. The group grow through acquisitions over the near to medium term, which is expected to be funded prudently via debt and internal accruals. Healthy profitability and lower reliance on working capital debt have kept debt protection metrics strong, as reflected in net cash accrual to total debt and interest coverage ratios of over 14 times and 100 times, respectively, for fiscal 2022. 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 foreign exchange (forex) rates

The group mainly caters to therapeutic segments such gastro, cardiovascular, antibiotic and pain management. High concentration in the relatively slow-growing acute therapeutic segments (50% of domestic sales) exposes the group to pricing and competitive pressure in a mature market, more especially as 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 intensify 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, Supreme Court vide its judgement dated April 2020, set aside the order of the closure of 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.

 

Sale 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 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 US FDA remains a key monitorable.

Liquidity: Strong

Liquidity is supported with expected healthy cash accruals of over Rs. 400 crore in fiscal 2023, which is sufficient to meet annual debt repayment obligations of Rs 75-100 crore and fund the organic capex of Rs 70-90 crore. Inorganic growth plans are also likely to be funded prudently through a mix of debt and internal accrual. Cash and cash equivalents were moderate at Rs 59 crore as on March 31, 2022 and expected to remain in the range of Rs 50-100 crore on a steady-state basis. Sanctioned fund-based bank line of Rs 252 crore was moderately utilised at less than 20% on average during the 12 months through March 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 revenues 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 margins (over 22%)
• Sustenance of healthy financial risk profile and debt 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 debt 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 i.e. Tau Investments Holdings PTE Ltd held 54%, mutual funds held 14.27% and the balance was held by the public and others.

Key Financial Indicators

As on/for the period ended March 31		2022^	2021
Revenue	Rs crore	2424	2043
Adjusted PAT*	Rs crore	372	443
Adjusted PAT margin*	%	15.4	21.7
Adjusted debt/adjusted networth	Times	0.01	0.02
Interest coverage	Times	113.79	87.00

^Provisional financials

*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	Cash Credit*	NA	NA	NA	120	NA	CRISIL AA/Stable
NA	Letter of Credit#	NA	NA	NA	11	NA	CRISIL A1+
NA	Letter of Credit@	NA	NA	NA	9	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Apr-25	300	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	200	NA	CRISIL AA/Stable

*Cash credit is interchangeable with export packing credit, foreign bills purchase, and working capital demand loan facilities
@ Letter of credit is interchangeable with bank guarantee, cash credit, export packing credit, foreign bill purchase and working capital demand loan facilities
# Letter of credit is interchangeable with bank guarantee