Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the non-convertible debentures (NCDs) of Mankind Pharma Ltd (Mankind).

 

The rating reflects the established business risk profile of the company, supported by its strong market position in the domestic formulations market, diversified presence across therapies, healthy portfolio of consumer healthcare products and extensive distribution network. The rating also factors in healthy operating profitability and regulatory-compliant manufacturing facilities, as well as strong financial risk profile and robust liquidity position. These strengths are partially offset by high dependence on the domestic market and susceptibility to regulatory changes, including price revisions under the Drug Price Control Order, and volatility in input prices.

 

Revenue stood at Rs 10,419 crore in fiscal 2024, registering around 18% growth over fiscal 2023, supported by higher exports, robust growth in modern trade channel, price hikes in the domestic formulations market as well as new launches, particularly in the high-growth chronic segment. The revenue increased at compound annual growth rate (CAGR) of 15% over the last five fiscals, beating growth of the broader IPM (Indian pharmaceutical market);Company has consistently been outperforming the IPM in volume growth. CRISIL Ratings expects Mankind to achieve low-mid double digit revenue growth rate over the medium term, supported by leading position in key therapies and continued new launches.

 

Earnings before interest, tax, depreciation and amortisation (EBITDA) for fiscal 2024 stood at Rs 2,636 crore (25.3% margin), compared with Rs 1,976 crore (22.5% margin) in fiscal 2023. Higher EBITDA margin in fiscal 2024 was owing to better gross margin led by increase in share of chronic segment, aided by price hikes as well as cost-saving measures undertaken by the company. Improvement in EBITDA will be driven by increase in the share of high-margin chronic segment as well as operating leverage benefits with revenue growth. Further, as the company continues to scale up brands, improved productivity will also support margin improvement.

 

The financial risk profile of the company was healthy with strong networth and minimal debt, translating into robust debt protection metrics. Besides, the company also has sizeable liquid surpluses of over Rs.3,450 crore at March 31, 2024.

 

As Mankind has been outperforming the domestic pharma sector’s revenue growth over time, it is looking at sustaining this trend going forward, and is considering expanding its product portfolio, especially chronic therapies, besides entering into new therapeutic segments, which are niche, have high entry barriers and offer high margins. This could be through the inorganic route as well. CRISIL Ratings notes that the company has also successfully integrated its earlier sizeable acquisition of brands of Panacea Biotech, acquired in fiscal 2022, and has scaled up revenue of acquired portfolio/brands. The management is currently exploring inorganic growth opportunities and keeping themselves ready for acquisitions which may also provide support to their business risk profile by increasing their market share in key chronic segments through leveraging their extensive distribution network and further diversify presence in high-entry barriers business. CRISIL Ratings also takes comfort from the fact that Mankind has maintained financial prudence in the past, as evident from the low Debt/EBITDA levels. The management stance of maintaining steady state net debt to EBITDA ratio at not more than 2 times, in the event of any material acquisition further provides comfort, The management may also pursue sizeable acquisitions should opportunities arise; it has sought  approval for  increasing  debt limits upto Rs, 12,500 crore via enabling resolutions, and also has taken approval from its board of directors and shareholders to raise equity upto Rs.7,500 crore via a qualified institutional placement (QIP) route. The equity raise if needed, will be utilized to pare acquisition related debt.       

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Mankind and its subsidiaries, associates and joint ventures as they have strong operational and business linkages.

 

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 domestic formulations market: Mankind is the fourth-largest player by value in the Indian pharmaceuticals market and the third-largest in terms of volume. The company has diversified presence across chronic, acute and consumer healthcare segments, with the top five therapies contributing to around 57% of revenue. Company strategically introduces multiple brands within the same therapeutic area, which allows them to cater to the requirements of a wide range of patients. Further, this also allows them to increase their market presence, enabling them to capture market share, as seen it many of their brands occupying top 3 positions in their respective sub-group (including Dydroboon (Gynaecology), Gudcef (Anti-infectives), Candiforce (Dermatology), Nurokind-Gold (Nutrients), Monticope (Respiratory) etc.)

 

It has emphasised presence in the highly stable chronic segment (35.5% in fiscal 2024, up from 32.2% in fiscal 2020) owing to higher realizations and profit. The segment has consistently outperformed IPM chronic growth over the last five fiscals and the management has plans to expand the share of this segment further over the medium term through organic as well as inorganic routes.

 

Furthermore, Mankind has a strong portfolio of over 40 brands (each accounting for revenue over Rs 50 crore), many of which enjoy top ranks in their sub-groups. The company has successfully scaled up a number of brands, with 11 brands contributing revenue over Rs 200 crore in fiscal 2024 (seven as of fiscal 2020). It also remains well-diversified across brands, with the top 20 brands contributing around 36% of revenue in fiscal 2024. It has been continuously gaining market share with new launches across therapies in IPM.

 

Mankind also has a strong consumer healthcare business, with revenue scale of over Rs.700 crore as of fiscal 2024 with multiple brands holding leading market ranking.

 

• Strong operational efficiency and distribution network: Mankind has largely grown organically, which coupled with strong revenue growth, aided by continuous launches and gain in market share in key therapies, while maintaining operating or EBITDA margin at over 24%, resulting in return on capital employed (RoCE) of over 30%. Its only sizeable acquisition in 2022 was that of brands of Panacea Biotech, which it has successfully integrated in its business, and also scaled up business levels, through its sizeable distribution network and reach.

 

The company also benefits from a strong distribution network, with over 16,000 salesforce, 13,000 stockists, and 500,000 doctors. This has enabled Mankind to scale up new launches quickly. Further, with its strong distribution reach, the company has been able to expand beyond metro and tier 1 cities, with 47% revenue coming in from tier 2 and other cities.

 

Price regulated products accounted for around 15% of the revenue in fiscal 2024 (around 12.7% in fiscal 2022). Hence, the company takes price hikes up to around 10% in non-scheduled formulations (85% of the product portfolio) every year. Its large in-house manufacturing (around 75%) also supports profitability.

 

• Comfortable financial risk profile: With revenue CAGR of around 15% over last five fiscals and operating margin of 23-27%, the company has as generated strong cash accruals. Tangible networth was Rs 7,893 crore and gearing low at 0.02 time as on March 31, 2024. Debt protection metrics were comfortable, as reflected in interest coverage and net cash accrual to adjusted debt (NCAAD) ratios over 84.43 times and 11.9 times, respectively, in fiscal 2024 (48 times and 10.1 times, respectively, in fiscal 2023). The company has met its capital expenditure (capex) through internal accrual, limiting reliance on external debt and sustaining strong financial risk profile. Expected organic capex of around Rs 600-700 crore per annum over the medium term will continue to be funded through cash accrual. Furthermore, the working capital cycle is efficiently managed, with inventory of 70-80 days, receivables of 20-30 days and payables of 120-130 days.

 

As part of its growth strategy, the company is considering enhancing its portfolio especially chronic therapies, besides entering into new therapeutic segments, which are niche, have high entry barriers and offer high margins. This could be through the inorganic route as well. The management is currently exploring inorganic growth opportunities which could be funded through a healthy mix of debt and equity. While the debt raised for acquisition could temporarily moderate the leverage and coverage metrics, the company is committed to maintaining manageable debt levels over the medium term and to manage that, the company has also secured board approval to raise equity up to Rs.7,500 crore, with the proceeds primarily to be used to pare down debt, in the event of a sizeable acquisition. Steady state net debt to EBITDA levels are likely to be maintained at below 2 times, should any large acquisition materialize.

 

In fiscal 2024, Income Tax officials conducted a search operation at the premises of Mankind. The company has provided necessary documentation to the authorities and is awaiting further development in this regard. Any sizeable outgo, which may result in contraction of the liquid surplus or raising debt will be a monitorable.

 

Weaknesses:

• Limited geographical diversification with high dependence on the domestic market: Company has limited geographical diversification, with sales in the domestic market accounting for around 92% of overall revenue in fiscal 2024 and exports the balance. While Mankind’s exports are also growing at a reasonable pace, management intends to focus largely on the domestic market and therefore exports are not expected to account for more than 10-12% of overall sales over the medium term. While this safeguards the company from global headwinds, it also limits exposure to global growth opportunities and diversification benefits, increasing vulnerability to local market-specific issues.

 

• Susceptibility to regulatory changes and fluctuations in raw material prices: The company is susceptible to regulatory changes in Indian and global markets. Addition to the list of drugs covered under National List of Essential Medicines (NLEM) affect product pricing and hence profitability. In international markets, regulatory risks are manifested by increasing scrutiny and inspections by the United States Food and Drug Administration (US FDA), European Medical Agency and Therapeutic Goods Administration, Australia. Currently, none of the company’s facilities have any outstanding observations from the US FDA. Continued regulatory compliance and product launches will be critical for revenue growth and will remain key monitorables. Prices of active pharmaceutical ingredients (key raw materials) are volatile. Hence, profitability is susceptible to fluctuations in input prices.

Liquidity: Strong

Cash accrual, expected at around Rs 2,000 crore per annum, will sufficiently cover annual capex of Rs 700 crore and working capital requirement. Debt was modest  at Rs 196 crore as on March 31, 2024, mainly comprising short-term debt. Unencumbered cash surplus was Rs 3,456 crore as on March 31, 2024. Working capital limit of around Rs 895 crore was utilised 1% on average over the 12 months through March 2024. For the planned acquisition, the company will deploy substantial portion of the existing liquidity; nonetheless, liquidity, on steady state basis, will remain heathy above Rs 1,000 crore.

Outlook: Stable

The business risk profile of Mankind will remain stable over the medium term supported by its diversified presence across therapies and established position in the domestic market through strong brands. The company is also expected to sustain operating profitability in the range of 25-26% on steady state basis. Healthy cash accrual and prudent capital spending will help sustain strong  financial risk profile over the medium term. Any sizeable acquisition is also expected to be prudently funded, obviating pressure on the balance sheet.

Rating Sensitivity factors

Upward factors

• High double-digit revenue growth supported by improved revenue diversification across therapies and geographies, with operating profitability improving above 26-27% on a sustained basis, benefitting cash generation
• Sustenance of healthy financial risk profile, and strong debt metrics.

 

Downward factors

• Substantial decline in revenue or deterioration in operating margins to below 21-22% on a sustained basis
• Higher-than-expected outflow towards any acquisition or change in management stance on equity raise (to refinance the acquisition debt) leading to substantial delay in the deleveraging trajectory; for instance net debt to EBITDA remaining in excess of 2.5 times
• Any adverse outcome of the income tax search proceedings, adversely impacting financial risk profile.

About the Company

Commenced its operations in 1995, Mankind is engaged in developing, manufacturing and marketing a diverse range of pharmaceutical formulations across various acute and chronic therapeutic segments as well as several consumer healthcare products. It is India’s fourth-largest pharmaceutical company in terms of domestic sales and third-largest in terms of domestic sales volumes. The company has 30 manufacturing across 6 locations, and all of the facilities have necessary accreditations.

 

Ramesh Juneja, Rajeev Juneja and Sheetal Arora are the promoters, and along with their family members they hold 74.88% stake in Mankind and balance shareholding is held with the public and other shareholders.

Key Financial Indicators

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs.Crore	10419	8799
Reported profit after tax (PAT)	Rs.Crore	1942	1310
PAT margin	%	18.6	14.9
Adjusted debt/adjusted networth	Times	0.02	0.03
Interest coverage	Times	97.61	47.99

Note: Debt excludes lease liabilities. Numbers mentioned in rationale are CRISIL adjusted numbers.

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 Levels	Rating Assigned with Outlook
NA	Non-convertible debentures*	NA	NA	NA	4,600	Simple	CRISIL AA+/Stable

*Yet to be placed