Detailed Rationale

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

 

The group’s revenues increased by 15% year-on-year in fiscal 2021, aided by growth in domestic and export formulations. The export formulations business reported healthy growth of 18% to Rs 1,127 crore in fiscal 2021, aided by strong performance in US and South African markets. On the other hand, domestic formulation sales grew by 12% to Rs 892 crore in fiscal 2021, aided by increasing focus on key therapeutic segment, improved productivity and new product launches. Revenue is expected to remain healthy at 15%-20% annually over the medium term, supported by the group’s diversified portfolio and established position in domestic and export formulations market.

 

Operating margin improved to 27.4% in fiscal 2021, from 21.5% in fiscal 2020, driven by improved product mix with increasing share of focused products and better realization in international market. Profitability in fiscal 2021 was also supported by lower sales and marketing costs amidst the pandemic. The operating margin is expected to sustain at 23-25% over the medium term, on the back of continued focus on cost optimisation and enhanced product mix.

 

Financial risk profile is healthy, with adjusted gearing of 0.02 time as on March 31, 2021. Capital expenditure (capex) of Rs 60-70 crore over the medium term is expected to be prudently funded through internal accrual and liquid surplus. The group may grow through acquisitions over the near to medium term, which is expected to be largely funded through internal accruals and liquidity. Any large debt-funded capex or acquisition could impact the group’s capital structure and debt protection metrics; hence will be a key monitorable.

The ratings continue to reflect the group’s established position in the pharmaceutical industry and 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

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of JB Chemicals and all its wholly owned subsidiaries: Unique Pharmaceuticals Laboratories FZE (Dubai), OOO Unique Pharmaceutical Laboratories (Russia), and its 95.24% subsidiary, Biotech Laboratories (Pty) Ltd (South Africa). This is because these entities, collectively referred to herein as the JB Chemicals group, have common management and business interests.

 

CRISIL Ratings has amortised goodwill on consolidation and intangibles over five 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 group derived 43% and 57% of the consolidated revenue, respectively, in fiscal 2021, from India and the international market. Its three brands—Rantac (anti-peptic ulcerant), Cilacar (calcium channel blocker), and Metrogyl (amoebicides)—feature among the top 200 brands in India, and accounted for over 75% of domestic formulations revenue. Further, the group has well-balanced portfolio, with acute and chronic segment accounting for 55% and 45% of domestic formulations revenues respectively in fiscal 2021. In the international segment, the group is present in regulated and semi-regulated markets, including Russia and countries of the Commonwealth of Independent States.

* Healthy financial risk profile 

Financial risk profile is driven by healthy capital structure and strong debt protection metrics. Gearing is estimated at 0.02 time as on March 31, 2021, and may remain negligible over the medium term. Healthy profitability and lower reliance on working capital debt should keep debt protection metrics strong, as reflected in net cash accrual to total debt and interest coverage ratios of over 12 times and 90 times, respectively, for fiscal 2021. Planned capex of Rs 60-70 crore towards annual maintenance would be funded internally. The group may grow through acquisitions over the near to medium term, which is expected to be largely funded through internal accruals and liquidity. Liquidity remains healthy, because of surplus liquid funds of about Rs 696 crore as on March 31, 2021, and is expected to remain adequate over the medium term. Any large debt-funded capex or acquisition could impact the group’s capital structure and debt protection metrics; hence will be a key monitorable.

Weaknesses

* Susceptible to intense competition and fluctuations in forex rates

The group mainly caters to therapeutic segments, including gastro, cardiovascular, antibiotic, and pain management. High concentration in the relatively slow-growing acute therapeutic segments (55% of domestic sales) exposes the group to pricing and competitive pressure in a mature market segment, also given that products under price control account for 35% of sales. The group further remains vulnerable 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 Drug Price Control Order impacts product pricing and, thereby, profitability of players, though the extent of the impact may differ. Furthermore, regulatory risks faced by the group are manifested by increasing scrutiny and inspections by authorities such as the US Food and Drugs Administration (US FDA) and Therapeutic Goods Administration, Australia. For instance, in January 2016, JB Chemicals received a notification, along with several other companies, from National Green Tribunal to shut down its active pharmaceutical ingredient (API) plant in Panoli (Gujarat).  Thereafter, Supreme Court vide its Judgement dated 1 April 2020 decided to set aside the order of the closure of API Unit on the basis of precautionary principle with direction to the company to pay  one time compensation of Rs 10 crores, which has been paid.

 

Sale of Rantac (JB Chem’s second-largest brand) 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 even though growth was flattish. While JB Chem 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 by cash and cash equivalents of Rs 696 crore as on March 31, 2021. In the absence of any long-term debt, cash accrual is largely used for capital expansion and dividend payout. Total outgo was Rs 121 crore in fiscal 2021, and will be at similar levels, going forward. CRISIL Ratings believes the company has sufficient accrual and cash and cash equivalents to finance its capex. The group may grow through acquisitions over the near to medium term, which is expected to be largely funded through internal accruals and liquidity. Liquidity is expected to remain adequate at about Rs. 150-200 crores over the medium term.

Outlook: Stable

CRISIL Ratings believes the JB group will continue to be aided by its established market position in India and healthy financial risk profile. Gradual increase in share of regulated markets, should help diversify the revenue profile.

Rating Sensitivity Factors

Upward factors:

• Considerable ramp-up in scale, sustained revenue growth (over 20% per fiscal), with better diversification of the revenue profile
• Healthy operating profitability above 25% on a sustained basis
• Sustenance of the healthy financial risk profile, with gearing below 0.2 times

Downward factors:

• Sustained decline in operating margin to below 15%
• Substantial debt-funded capital expenditure (capex) or acquisitions weakening the capital structure with gearing above 0.5 times.Significant decline in liquidity position.

About the Company

JB Chemicals was originally set up as JB Mody Chemicals and Pharmaceuticals Ltd, by promoter, Mr JB Mody and his family in 1976, for manufacturing 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 2021, out of the total promoter holding of 55.91%, Tau Investments holdings PTE ltd held 54% and the balance 1.91% by other promoters and their entities while the remaining 44.09% was held by the public.

Key Financial Indicators

As on/for the period ended March 31		2021^	2020
Revenue	Rs.Crore	2043	1771
Adjusted PAT*	Rs.Crore	437	259
Adjusted PAT margin*	%	21.4	14.6
Adjusted debt/adjusted networth	Times	0.02	0.02
Interest coverage	Times	92.91	126.25

^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.Cr)	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

*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