| Jubilant Life Sciences Limited | ||||
| Long-term rating continues on 'Watch Developing'; CP reaffirmed | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL's ratings on the non-convertible debentures (NCD) of Jubilant Life Sciences Limited (JLL) continue on 'Rating Watch with Developing Implications' and reaffirming its 'CRISIL A1+' rating on the entity's commercial paper programme. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of JLL and its subsidiaries, collectively referred to as JLL. That is because these companies have considerable operational and financial linkages. Furthermore, CRISIL has amortised the goodwill arising out of acquisitions over a decade from the date of the respective acquisitions. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strong business risk profile, backed by diversified revenue The company has pursued significant diversification of businesses even while building on its knowledge of chemistry. The pharmaceuticals segment is expected to benefit from established market position of Triad Isotopes Inc (Triad) in the US. About 58% of the revenue came from the pharmaceuticals segment while LSI contributed 39% in fiscal 2019. These two segments have diversified sub-segments. Revenue is geographically diversified across North America, India and rest of the world. Revenue grew 21% in fiscal 2019, backed by strong growth of 33% in the pharmaceuticals segment, driven by the full-year benefit of the acquisition of the radiopharmacy business of Triad in September 2017. Through Triad, JLL has presence in front-end radiopharmaceutical distribution in the US. In the first half of fiscal 2020, the pharmaceuticals segment grew about 10%. Growth from new products and execution of existing contracts in radiopharmaceuticals, and steady growth in allergy therapy products and the contract manufacturing segment should continue to boost the specialised pharmaceuticals business. * Focus on regulated markets with niche products support profitability Operating margin in the pharmaceuticals segment is backed by focus on regulated markets and a healthy portfolio of niche products. For instance, in the radiopharmaceuticals business,a speciality product portfolio with limited competition drives profitability. * Economies of scale and integrated operations underpin performance in the LSI segment Business risk profile in the LSI segment is backed by high operating efficiency. Economies of scale derived from global presence of capacities, high level of integration in manufacturing, deep chemistry knowledge, and continuous improvement in cost efficiency have insulated the operating margin from volatility in input prices as well as any shift in demand between different products in the value chain. Thus, the operating margin has increased to 13.70% in the first half of fiscal 2020 from 12.60% in the first half of fiscal 2019. * Adequate and improving financial risk profile Strong cash-generating ability, prudent capital spend, and efficient working capital management strengthen the financial risk profile. Adjusted gearing moderated to 1.6 times as on March 31, 2019, from over 2 times as on March 31, 2017, and is expected to improve further. This should lead to sustained improvement in credit metrics. The balance sheet was moderately leveraged during fiscals 2016 and 2017, and has improved as term debt is repaid, while networth benefits from strong accretions to reserve. Gearing weakened marginally in fiscal 2019 because of issuance of bonds to refinance an existing loan with the excess funds parked as cash and cash equivalents. Adjusted gearing was 1.6 times and gearing on net debt basis was 1.1 times as on March 31, 2019. The ratio of net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) was 2 times (2.2 times for a year earlier). The impact of the proposed demerger on the financial risk profile will remain closely monitored until the debt and the repayment ability of the demerged businesses can be ascertained. Weaknesses * Product concentration in some businesses In the radiopharmaceuticals business, significant revenue is derived from a single product. However, the risk is mitigated as products have high entry barriers, limiting competition. The company is also diversifying through niche product launches in the radiopharmaceuticals business. In the LSI business, revenue contribution is high from ethyl acetate, acetic anhydride, pyridine, and Vitamin B3. Revenue from the LSI segment has moderated in the last few quarters because of lower realisation in the acetyl segment and high prices of molasses. The segment declined by 10% in the first six months of fiscal 2020. * Exposure to regulatory risks and intense competition The regulatory scrutiny that JLL is exposed to is manifested in its generic facility in Roorkie (Uttarakhand), receiving a warning letter from the US Food and Drug Administration (FDA). Official action was indicated for its facility in Nanjangud (Karnataka) as well by the US FDA in fiscal 2019. The company remains exposed to risks related to timely resolution of the issues at its Roorkie and Nanjangud facilities In the LSI business, JLL faced anti-dumping duty for its pyridine exports to China in 2015. The company has since entered other geographies, thereby derisking pyridine exposure to China. Further, in January 2020, China has terminated the anti-dumping duty. However, any adverse impact of regulatory actions on revenue and profitability will remain a key rating sensitivity factor. Furthermore, the solid dosage business is intensely competitive because of aggressive defence tactics by innovator companies through introduction of authorised generics, and healthcare cost containment measures by the US government. Also, solid dosage formulations players in the US and Europe are vulnerable to pricing pressure owing to increase in the number of players and consolidation among distributors. |
| Liquidity Strong |
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Liquidity is supported by healthy annual cash generating ability (over Rs 1,000 crore) and moderate utilisation of bank lines (about 64% for the six months through September 2019). Large capital expenditure (capex) of Rs 600-700 crore annually is expected to be funded prudently with low reliance on debt .The company is expected to generate sufficient cash accruals against negligible term debt repayment over the medium term. Cash and cash equivalents including other bank balance were at Rs 1,363 crore as on September 30, 2019. |
| About the Company |
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JLL is an integrated global pharmaceutical and life sciences company engaged in pharmaceuticals, LSI, and drug discovery and development solutions. In the pharmaceuticals segment, JLL manufactures active pharmaceutical ingredients, solid dosage formulations, radiopharmaceuticals, and allergy therapy products through its wholly owned subsidiary, Jubilant Pharma Ltd, and undertakes contract manufacturing of sterile and non-sterile products through six US FDA-approved manufacturing facilities in India, the US, and Canada. It also has a network of over 50 radiopharmacies in the US. The LSI segment is engaged in speciality intermediates, nutritional products, and life science chemicals through five manufacturing facilities in India. The drug discovery and development solutions segment provides proprietary in-house innovation and collaborative research and partnership for out-licensing through two research centres in India. As on September 30, 2019, the promoters held 50.68% stake in JLL, and the balance was held by the public and others. For the first six months of fiscal 2020, revenue and profit after tax (PAT) were Rs 4,448 crore and Rs 434 crore, respectively, as against Rs 4,348 crore and Rs 413 crore for the first half of fiscal 2019. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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