Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Sahajanand Medical Technologies Ltd (SMTL; a part of the SMTL group); to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-‘.

 

The revision in outlook reflects lower-than-expected revenue and profitability, resulting in lower cash accrual coupled with delay in equity infusion which has resulted in deterioration in capital structure.  On account of debt funded acquisition and ongoing capital expenditure plans debt had increased during fiscal 2021.

 

Revenue was impacted during the first half of fiscal 2021 by the Covid-19 pandemic-induced disruptions and accordingly lower surgeries. Vascular Concepts Ltd (VCL), which was expected to drive the addition of newer products and thereby support revenue growth, also exhibited lower-than-expected scale-up. Revenue was Rs 588 crore in fiscal 2021 and operating margin (earnings before interest, depreciation, taxes and amortization [EBIDTA]) was around 12%.

 

Accordingly, debt to EBIDTA remains high along with moderation in debt protection metrics to around 3 times for fiscal 2021. While the group has filed draft red herring prospectus with Securities and Exchange Board of India for fresh issue of Rs 400 crore; necessary regulatory clearances and successful completion of the initial public offering (IPO), would remain key monitorables.

 

The rating continues to reflect the extensive experience and technical expertise of the promoters and professionals in manufacturing coronary intervention devices and sizeable market share coupled with robust distribution network. The rating also factors in moderate capital structure. These strengths are partially offset by volatile-although-moderate operating margin, large working capital requirement and exposure to regulatory risks.

Analytical Approach

CRISIL Ratings has consolidated business and financial risk profile of SMTL with Sahajanand Medical Technologies Ireland Ltd (SMTIL, 100% subsidiary), SMT Cardiovascular Pvt Ltd (SMTCPL; 100% subsidiary), Zarek Distribuidora De Produtos Hospitalares (75% stepdown subsidiary), Imex Clinic SL (100% stepdown subsidiary), VCL (100% subsidiary) and Vascular Innovations Ltd (100% stepdown subsidiary). This is because all these entities (collectively referred to as the SMTL group), are engaged in similar line of business and derive synergies from each other. SMTL has also given corporate guarantees for debt availed by SMTIL and SMTCPL.

 

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

Extensive experience and technical expertise of promoters

The SMTL group was founded by Mr Dhirajlal Kotadia in 1993 to offer laser technology-based solutions to the diamond industry. Over the decades, the group has also established itself as a pioneer in providing automated capital equipment for the diamond industry in India. The promoters leveraged their expertise in laser technology to manufacture stents, with the help of skilled professionals with technical expertise in the medical field. High quality of products led to a favourable outcome of a randomised clinical trial study in September 2018.

 

During fiscal 2020, the group also acquired the Imex SC, Zarek and the Vascular Concepts group, which has widened its distribution network and product portfolio, by including the niche product, transcatheter aortic valve implantation (TAVI).  

 

Sizeable market share and robust distribution network

The SMTL group had significant market share of 31% in fiscal 2021 in the drug eluting stent market in India, a significant increase from 21% in fiscal 2019; revenue was Rs 589 crore in fiscal 2021. The group continues to benefit from its robust distribution network which helps reach out to several hospitals. Higher capacity, healthy prospects for domestic players due to a price cap, and acquisition of sales and distribution entities in Brazil and Spain, should further aid growth in the global market. Impact of sales of new products from the Vascular Concepts group on revenue profile to remain monitorable.

 

Moderate capital structure

Total outside liabilities to adjusted networth ratio (TOL/ANW) is estimated at 1.4 times as on March 31, 2021; the ratio increased from sub 0.5 time as on March 31, 2020 owing to debt-funded acquisition and capex. While equity infusion through IPO should improve the capital structure, the timeline will remain a key sensitivity factor. 

 

Weaknesses

Large working capital requirement

Gross current assets were 300-400 days over the three years ended March 31, 2021, driven by large receivables of 160-180 days and inventory of 100-110 days. The group gives credit of 60-90 days to customers, majorly hospital chains which are usually stretched. The group is in the process of adding distributors that would result in relatively lower receivable cycle and inventory. Stents vary in length, in diameter, in thickness and in flexibility, depending varying requirement for each patient. Maintaining such assortment increases inventory.

 

Volatile, though moderate, operating margin

Operating margin has fluctuated between 11% and 20% for three fiscals through 2021. Profitability tends to be volatile, owing to higher allocation of funds to research and development (a critical aspect of the business) activities along with change in product mix in the revenue. Additionally, increase in debt led to Interest coverage ratio moderating to around 3 times. The group’s plans to increase sales through distributor can also impact operating margin.

 

Exposure to regulatory risks

The group remains susceptible to adverse changes in regulations or government policies. Any delay or inability in obtaining or maintaining permits/licenses/registrations could impact operating performance.                  

Liquidity Adequate

Cash accrual is projected at above Rs 56 crore and Rs 100 crore for fiscals 2022 and 2023, respectively, sufficient to cover the maturing debt of Rs 45 crore and Rs 73 crore. The fund-based limit of Rs 75 crore was utilised at 59.4% during the 12 months through August 2021. Cash and cash equivalents were Rs 145 crore as on March 31, 2021. The group’s planned capex of around Rs 60 crore in fiscal 2022, will be funded partly by debt and cash accruals. Further, primary equity infusion of around Rs 400 crore on back of IPO should support liquidity going ahead. 

Outlook Negative

CRISIL Ratings believes the SMTL group’s capital structure and debt to EBIDTA would moderate in absence of equity infusion or improvement in operating margin.

Rating Sensitivity factors

Upward factors

• Quick scale up in operations and improved profitability, with debt to EBIDTA improving below 2 times on sustained basis
• Significant improvement in the financial risk profile, particularly capital structure
• Sustained reduction in the working capital cycle

 

Downward factors

• Decline in revenue and profitability, resulting in lower-than-expected cash accrual
• Delay in equity infusion resulting in capital structure remaining leveraged and leading to higher-than-expected debt to EBIDTA ratio remaining above 4 times
• Any further debt-funded acquisition or capex, or a further stretch in the working capital cycle

About the Group

SMTL was incorporated in 1998, by the promoter, Mr Dhirajlal Kotadia, and his family members. The company manufactures medical stents used in cardiac surgeries; products are marketed under the SMT brand. PE players, Samara Capital Markets Holding Ltd and NHPEA Sparks Holdings BV, hold stakes of 36.59% and 18.44%, respectively.

 

SMTIEL, 100% subsidiary of SMTL, was incorporated in 2016. It undertakes research and marketing activities in Europe. 

 

SMTCPL, 100% subsidiary of SMTL, was incorporated in November 2019. The company is undertaking capex for a new facility in Telangana, India.

 

Zarek Distribuidora De Produtos Hospitalares, 75% subsidiary of SMTIEL, was acquired in October 2019. It sells, markets and distributes medical devices.

 

Imex Clinic SL, 100% subsidiary of SMTIEL, was acquired in July 2019; it distributes medical merchandise. 

 

VCL, 100% subsidiary of SMTL, and Vascular Innovations Ltd, a fully owned subsidiary of SMTIEL, were both acquired in May 2020. The companies execute research, manufacturing and distribution of medical equipment such as coronary stents, cardiac closure devices, peripheral stents, unique balloon catheters such as percutaneous transvenous mitral commissurotomy balloons and TAVI.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs. Cr.	588.8	479.9
Profit After Tax (PAT)	Rs. Cr.	-36.92	45.02
PAT Margins	%	-12.3	5.3
Adjusted Debt/Adjusted Networth	Times	1.54	0.22
Interest coverage	Times	2.69	7.69

 

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Sahajanand Medical Technologies Private Limited	Full Consolidation	Common management and same line of business
Sahajanand Medical Technologies Ireland Limited	Full Consolidation	Subsidiary , same line of business and corporate guarantee
SMT Cardiovascular Pvt Ltd	Full Consolidation	Subsidiary, same line of business and corporate guarantee
Zarek Distribuidora De Produtos Hospitalares	Full Consolidation	Subsidiary and same line of business
Imex Clinic SL	Full Consolidation	Subsidiary and same line of business
Vascular Concepts Limited	Full Consolidation	Subsidiary and same line of business
Vascular Innovations Limited	Full Consolidation	Subsidiary and same line of business