Rating Rationale
March 27, 2024 | Mumbai
Neuland Laboratories Limited
Long-term rating upgraded to 'CRISIL A+/Stable'; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.540 Crore
Long Term RatingCRISIL A+/Stable (Upgraded from 'CRISIL A/Stable')
Short Term RatingCRISIL A1 (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Neuland Laboratories Ltd (NLL; part of the Neuland group) to ‘CRISIL A+/Stable' from ‘CRISIL A/Stable’ while reaffirming the ‘CRISIL A1’ rating on the short-term bank facilities of the company.

 

The rating upgrade reflects improved business performance in fiscal 2023 and in the current fiscal with better-than-expected revenue and operating performance, with operating margin rising by more than 30% in the nine months of fiscal 2024 driven by incremental contribution from the contract manufacturing services (CMS) and niche API [active pharmaceutical ingredients] segments. The group has achieved revenue of Rs 1,173 crore in the nine months of fiscal 2024 with operating margin around 30.9%, as against Rs 784 crore and 19.5%, respectively, in the corresponding period of fiscal 2023.

 

Contribution from the CMS segment stood at Rs 583 crore in 9m FY24 compared to Rs 261 crore in the nine months of fiscal 2023. Continued focus on development and commercialisation of molecules and higher share from the niche API segment will drive revenue growth. Operating performance will remain healthy, with earnings before interest, tax, depreciation and amortisation margin of 24-25% despite expected increase in raw material prices owing to supply chain constraints and volume discounts for the CMS segment.

 

The ratings reflect the established market position of NLL in the API segment, its established clientele, geographic diversification in revenue, healthy product diversity and comfortable financial risk profile. These strengths are partially offset by susceptibility to fluctuations in raw material prices, intense competition and regulatory risks; large working capital requirement and vulnerability of operating margin to fluctuations in foreign exchange rates.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of NLL and its wholly owned subsidiaries, Neuland Laboratories Inc, USA, and Neuland Laboratories KK, Japan, as these entities have synergistic businesses and same promoters and management.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

  • Established market position: NLL is an established player in the API segment with presence of more than four decades. The promoters' extensive experience in the bulk drugs industry, strong understanding of market dynamics and healthy relationships with customers and suppliers will continue to support the business.

 

  • Better-than-expected business performance fueled by the CMS segment: The group achieved revenue and operating margin of Rs 1,191 crore and 23%, respectively, in fiscal 2023, as against Rs 951 crore and 15.2%, respectively, in fiscal 2022. The growth was driven by shift in the business mix towards higher margin molecules and incremental contribution from the CMS segment. Contribution from the CMS segment improved from around 30% in fiscal 2022 to around 50% in the nine months of fiscal 2024. This, coupled with easing input prices, supported growth in operating margin. The healthy business performance is likely to be sustained over the medium term.

 

  • Well-established clientele: The group has three business segments: prime API, niche/specialty API and CMS, and caters to small/mid-sized venture-backed biotech companies. In the prime API segment, the group works on molecules either with a business leadership approach or in partnership with client on maintaining cost efficiency. In the niche/specialty API segment, the group continues to focus on niche APIs with complex chemistry and on filing IP for non-infringing processes. In the CMS business, the group woks as a virtual extension to developers’ research and development (R&D) team and thus was able to build healthy relationships with customers. The revenue contribution from the prime API segment reduced to 24% in the nine months of fiscal 2024 (32% in fiscal 2023), while CMS revenue contribution increased to 49% from 37% during this period. The revenue contribution from niche API and CMS will continue to increase over the next three years while that of prime API segment is expected to remain around 25%. Healthy relationships with top pharma players and strong R&D capabilities ensure healthy operating margin.

 

  • Geographic diversification in revenue: The group caters to clients in India and overseas. It derives over 80% of its revenue from export. In the CMS business, the entire revenue comes from regulated markets, such as the US, Europe and Japan. Diversity in geographic reach and clientele will continue to support the business risk profile.

 

  • Healthy product diversity: The group is an established player with operations of over 40 years. NLL has developed more than 300 processes and 100 APIs and has filed over 972 drug master files (DMFs) worldwide (66 active US DMFs). The product basket in diversified, mitigating the risk of obsolescence in case of new technology. The top 10 products contribute to 99-100% of prime API, 57% niche API and 90% CMS segment revenue.

 

  • Comfortable financial risk profile: Capital structure of the group remained strong with minimal reliance on external debt and increasing networth. Overall gearing stood at 0.17 time as on March 31, 2023. Expected capital expenditure (capex) will be funded through internal accrual and no significant moderation is likely in the capital structure. Debt protection metrics will remain comfortable with interest coverage ratio more than 15 times in the medium term.

 

Weaknesses:

  • Susceptibility to fluctuations in raw material prices, intense competition and regulatory changes: The bulk drugs industry is highly competitive which exerts pricing pressure on entities such as NLL. The group’s revenue declined by 10% in fiscal 2018, which led to lower absorption of fixed cost, impacted by higher raw material cost. In fiscal 2019, contribution margin for the API and CMS businesses fell from 59% and 46% to 52% and 38%, respectively. This necessitates the company to remain cost-competitive to maintain profitability.

 

  • Large working capital requirement: Gross current assets were at 203-225 days over the three fiscals through 2023 and at 226 days as on March 31, 2023. The working capital-intensive nature of operations is expected to continue.

Liquidity: Strong

Bank limit is mostly unutilised (less than 1%) for the 12 months through January 2024. Cash accrual, expected over Rs 300 crore per annum, will sufficiently cover yearly term debt obligation of Rs 35-40 crore over the medium term and surplus will cushion liquidity.


Current ratio was healthy at 1.75 times as on March 31, 2023. Low gearing and moderate networth support financial flexibility, which will help to withstand adverse conditions or downturns in the business.

Outlook: Stable

CRISIL Ratings the Neuland group will continue to benefit from its established market position and extensive experience of the promoters.

Rating sensitivity factors

Upward factors:

  • Improvement in the market position with revenue above Rs 2,000 crore and operating margin above 23%
  • Sustenance of financial risk profile

 

Downward factors:

  • Further stretch in the working capital cycle weakening the liquidity
  • Decline in net cash accrual below Rs 200 crore
  • Large, debt-funded capex weakening the capital structure

About the group

NLL was incorporated as a private limited company in 1984 by Dr D R Rao and Mr G V K Rama Rao. The company was reconstituted as a public limited company with the current name in 1994. It manufactures API for global pharmaceutical companies and provides end-to-end solutions to the pharmaceutical industry for chemistry-related services. It has three manufacturing facilities in Hyderabad, Telangana. The company is listed on the Bombay Stock Exchange and the National Stock Exchange.

Key financial indicators

As on / for the period ended March 31

Unit

2023

2022

Operating income

Rs crore

1,195.08

951.68

Reported profit after tax (PAT)

Rs crore

163.52

63.82

PAT margin

%

13.68

6.71

Adjusted debt / adjusted networth

Times

0.17

0.41

Interest coverage

Times

21.17

10.75

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of instrument(s)

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Bank Guarantee NA NA NA 0.2 NA CRISIL A1
NA Bank Guarantee NA NA NA 0.8 NA CRISIL A1
NA External Commercial Borrowings NA NA 31-Dec-2024 8.13 NA CRISIL A+/Stable
NA Foreign Currency Term Loan NA NA 31-Mar-2027 28.87 NA CRISIL A+/Stable
NA Foreign Exchange Forward NA NA NA 6.4 NA CRISIL A1
NA Letter of Credit NA NA NA 70 NA CRISIL A1
NA Letter of Credit NA NA NA 20 NA CRISIL A1
NA Letter of Credit NA NA NA 9 NA CRISIL A1
NA Letter of Credit NA NA NA 12 NA CRISIL A1
NA Letter of Credit NA NA NA 13 NA CRISIL A1
NA Long Term Loan NA NA 31-Dec-2025 11.23 NA CRISIL A+/Stable
NA Long Term Loan NA NA 31-Mar-2030 95 NA CRISIL A+/Stable
NA Long Term Loan NA NA 31-Dec-2025 6.25 NA CRISIL A+/Stable
NA Long Term Loan NA NA 31-Jul-2026 17.5 NA CRISIL A+/Stable
NA Proposed Term Loan NA NA NA 21.62 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 40 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 36 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 33 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 91 NA CRISIL A+/Stable
NA Working Capital Facility NA NA NA 20 NA CRISIL A+/Stable

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Neuland Laboratories Inc, USA

Full

Wholly owned subsidiary

Neuland Laboratories KK, Japan

Full

Wholly owned subsidiary

Neuland Laboratories Ltd

Full

Parent company
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 415.0 CRISIL A+/Stable / CRISIL A1   -- 25-04-23 CRISIL A1 / CRISIL A/Stable 21-04-22 CRISIL A2+ / CRISIL A-/Stable 09-09-21 CRISIL A2+ / CRISIL A-/Stable Withdrawn
      --   --   --   -- 14-04-21 CRISIL A2+ / CRISIL A-/Stable CRISIL BB+/Negative
Non-Fund Based Facilities ST 125.0 CRISIL A1   -- 25-04-23 CRISIL A1 21-04-22 CRISIL A2+ 09-09-21 CRISIL A2+ Withdrawn
      --   --   --   -- 14-04-21 CRISIL A2+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 0.2 Axis Bank Limited CRISIL A1
Bank Guarantee 0.8 State Bank of India CRISIL A1
External Commercial Borrowings 8.13 RBL Bank Limited CRISIL A+/Stable
Foreign Currency Term Loan 28.87 Kotak Mahindra Bank Limited CRISIL A+/Stable
Foreign Exchange Forward 6.4 State Bank of India CRISIL A1
Letter of Credit 70 State Bank of India CRISIL A1
Letter of Credit 20 IndusInd Bank Limited CRISIL A1
Letter of Credit 9 HDFC Bank Limited CRISIL A1
Letter of Credit 12 Kotak Mahindra Bank Limited CRISIL A1
Letter of Credit 13 Axis Bank Limited CRISIL A1
Long Term Loan 11.23 IndusInd Bank Limited CRISIL A+/Stable
Long Term Loan 95 State Bank of India CRISIL A+/Stable
Long Term Loan 6.25 Kotak Mahindra Bank Limited CRISIL A+/Stable
Long Term Loan 17.5 HDFC Bank Limited CRISIL A+/Stable
Proposed Term Loan 21.62 Not Applicable CRISIL A+/Stable
Working Capital Facility 40 IndusInd Bank Limited CRISIL A+/Stable
Working Capital Facility 36 HDFC Bank Limited CRISIL A+/Stable
Working Capital Facility 33 Axis Bank Limited CRISIL A+/Stable
Working Capital Facility 91 State Bank of India CRISIL A+/Stable
Working Capital Facility 20 Kotak Mahindra Bank Limited CRISIL A+/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for the Pharmaceutical Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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