Detailed Rationale CRISIL Ratings has placed Its ratings on the bank facilities of Solara Active Pharma Sciences Limited on ‘Rating Watch with Developing Implications’.
The rating action follows the significant deterioration in Solara’s revenue and profit levels for the third quarter of fiscal 2022, as per the announcement of the quarterly results on 9th February 2022. The turnover for the quarter ended December 2021 has declined to Rs.100 crore from Rs.401 crore for the previous quarter on account of a one-time impact due to change in the business strategy from a distributorship sale model to a direct customer sale model. Consequently, Solara reported an operating loss of Rs.94 crore and a net loss of Rs.140 crore for the quarter ended December 2021.
Net loss recorded by the company for the quarter ended December 2021 was due to two main reasons. One, revenue hit taken due to a sharp decline in demand in regulated markets from of its key product- Ibuprufen (API) which contributes close to 40-45 percent of the total revenues. Two, the company had taken a sale return of Rs.130 crore from distributors in the unregulated markets as part of its one-time business strategy reset. The sharp weakening in sales coupled with change in business strategy has resulted in sales turnover of Rs.908 crore for the 9-month ended December 2021 as against Rs.1172 crore for the same period during the previous fiscal. Consequently, the company reported an operating loss of 94 percent for the 9 months ended December 2021 from an operating profitability of 25 percent for the same period during the previous fiscal driven by sales returns and increased procurement costs. This is also expected to result in weakening of debt protection metrics; particularly interest coverage; which is expected to decline to less than 2 times for fiscal 2022. CRISIL Ratings shall monitor the performance of the company over the upcoming quarter. Improvement in revenues supported by revival of demand for key products along with a gradual improvement in profitability shall remain a key monitorable.
The ratings reflect Solara's established market position in its key APIs, such as Ibuprofen and Praziquantel, and strong relationships with its customers and suppliers. The ratings also factor in the company's above average financial risk profile. These strengths are partially offset by susceptibility of operations to regulatory changes, large working capital requirement, and exposure to risks related to implementation of capex and stabilisation and ramp up of the second phase of the project at Visakhapatnam |
Analytical Approach: For arriving at the rating CRISIL Ratings has consolidated the business and financial risk profiles of Solara and its subsidiaries Chemsynth Labarotories Private Limited, Sequent Penems Private Limited and Shasun USA INC.
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 market position in key APIs, along with strong customer and supplier relationships: Solara has a strong portfolio of APIs in key therapeutic segments, with expertise in anthelmintic, anti-malaria, anti-infective and non-steroidal anti-inflammatory segments. Furthermore, it has been increasing its focus on the non-steroidal anti-inflammatory segment by adding capacity, and working on other therapeutic segments. Solara has a diversified customer basis, with more exposure to regulated markets. Its longstanding presence in the industry has helped Solara build strong relationships with customers and suppliers.
Above average financial risk profile Solara’s financial risk profile is above average marked by a comfortable capital structure, albeit constrained by expected weakening of its debt protection metrics. The networth is expected decline marginally at the end of fiscal 2022,. However, the gearing is expected to remain below 1 time, supported by expected strong networth of Rs.1000 crore, despite the decline. Debt protection metrics are expected to remain subdued in fiscal 2022 significantly due to decline in operating profitability. Interest coverage for fiscal 2022 is expected to remain below 2 time and is expected to improve gradually over the medium term with moderation of operating profitability. However financial risk profile is supported by a comfortable gearing and unencumbered cash and cash equivalents supporting liquidity.
Weaknesses Exposure to risks related to implementation, stabilisation and ramp up of the second phase of the project at Visakhapatnam: Solara is undertaking a greenfield project at Visakhapatnam at a cost of around Rs 250 crore, to be funded through debt and equity infusion. The first phase of the project is has commenced operations from the third quarter of fiscal 2021 and the second phase is in progress and is expected to commence operations from the second/third quarter of fiscal 2023. Any time or cost overrun in the project will impact the financial risk profile adversely.
Exposure to risks relating to strict regulations: Most of the products manufactured by Solara face challenges of increased inspections and regulatory actions by authorities, such as the US Food and Drug Administration (US FDA). Additionally, production of a few products involves waste discharge, which needs to be treated in effluent treatment plants (ETPs). Thus, Solara needs to invest continuously to upgrade ETPs and bring efficiency in the process to reduce waste discharge.
Large working capital requirements Working capital requirements are high as reflected in high receivables and inventory at around 140 days as on September 30, 2021. The working capital requirements are expected to remain high on account of lower turnover coupled with sales returns during the third quarter of fiscal 2022. CRISIL Ratings expects the working capital requirements to gradually improve over the medium term with improvement in turnover. Correction in working capital requirements that shall aid in liquidity shall be a key monitorable. |
Liquidity: Strong Solara’s liquidity is expected to remain strong over the medium term. Though cash accrual for fiscal 2022 is expected to be inadequate to meet repayment obligations due to the unanticipated losses, unencumbered cash and cash equivalents of close to Rs.118 crore as on December 31, 2021, is expected to provide cushion to liquidity to meet repayment obligations of close to Rs.20 crore in the fourth quarter of the year. With expected improvement in revenues and profitability, the cash accrual is expected to improve and be adequate for meeting repayment obligations; however shall remain a key monitorable. Further the fund based working capital limits have been utilised at close to 90 percent over the 12month ended December 2021. Improvement in cash accrual aided by improvement in operating profitability shall remain a key monitorable. |
Rating Sensitivity factors Upward Factors
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About the Company Established in October 2017, Solara was formed through the demerger of the API business of Strides Shasun Ltd (currently named Strides Pharma Sciences Ltd). Solara acquired the human API business from Sequent Scientific Ltd during the same time, and hence, is a pure play API company. The company is listed on the Bombay Stock Exchange and the National Stock Exchange. |
Key Financial Indicators
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| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 17-Feb-2022 in line with the lender-wise facility details as on 7-Oct-2021 received from the rated entity
Criteria Details
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