Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities and commercial paper programme of Sun Pharmaceutical Industries Ltd (Sun Pharma).

 

The ratings continue to reflect the leadership position of the company in the domestic formulations segment, ramp-up in the global specialty business, strong presence in the regulated generics markets, expanding share in the rest-of-the-world markets (excluding India and the US), and robust financial risk profile. These strengths are partially offset by exposure to intense pricing pressure and regulatory risk in the domestic and regulated markets.

 

Consolidated revenue grew 10% year-on-year (y-o-y) in fiscal 2024 and 8% y-o-y for the first half of fiscal 2025, driven by double-digit growth in the domestic and US formulations market. This was led by ramp-up in sale of specialty products and healthy growth in domestic markets, led by new launches and volume, even as growth in rest of the world was moderate amid pricing pressures in Japan.

 

Operating margin was healthy at 27.0% in fiscal 2024 and 28.8% for the first half of fiscal 2025, supported by healthy revenue growth and increasing contribution of specialty products to the revenue mix (18% in fiscal 2024). CRISIL Ratings expects revenue to grow at high single-digit annually over the medium term, led by ramp-up in sales of key specialty products, despite delay in the launch of Deuruxolitinib amidst the ongoing litigation. The margin should sustain at 26-27% over the medium term, but will be constrained by expected increase in research and development (R&D) expenses (forming 7-8% of revenue), lag in accrual of commensurate returns on specialty products vis-à-vis marketing expenses, and exposure to foreign currency risk.

 

Financial risk profile remains strong, marked by robust adjusted networth of over Rs 56,000 crore, moderate debt and sizeable cash surplus of over Rs 22,000 crore as on September 30, 2024.  Debt reduced to Rs 2,081 crore as of September 30, 2024, from Rs 2,846 crore as on March 31, 2024, with company utilising existing liquidity to acquire all outstanding shares of Taro Pharmaceutical Industries Ltd, other than those already held by the group, for a consideration of Rs 2,902 crore. Financial risk profile is expected to remain strong over the medium term, with moderate annual capital expenditure (capex) of USD 200-250 million for routine maintenance. Working capital would be funded entirely through cash accrual and liquid surplus. While the company may undertake strategic acquisitions, any sizeable acquisition will remain monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Sun Pharma and its 106 subsidiaries, joint ventures (JVs) and associates, collectively known as Sun Pharma, as these entities have considerable operational and financial linkages. For JVs and associates, a moderate integration approach is followed; CRISIL Ratings factors in the share of profit from JVs, as also any incremental investment required by them. Furthermore, intangibles (such as brands and trademarks) and goodwill on consolidation have been amortised over five years.

 

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:

• Leadership position in domestic formulations: Sun Pharma is the leader in the domestic formulations segment (contributed 33% to revenue in the first half of fiscal 2025), with a market share of about 8.1% as on September 30, 2024 (source: All India Organisation of Chemists and Druggists MAT Data for Sep-2024). Its leading position in the chronic segment is backed by specialisation in technically complex products, strong brand equity and large product portfolio. Sun Pharma has 28 brands among the top 300 brands in the domestic market. It also ranks among the top 10 consumer healthcare companies in India and enjoys strong brand equity for key products such as Revital (vitamin and mineral supplement) and Volini (pain reliever). These brands give it a competitive edge and have helped build the foundation for the global over-the-counter (OTC) business. Sun Pharma sells OTC products in over 20 international markets. Its key therapeutic areas in domestic formulations are neuro-psychiatry, cardiology, gastroenterology, pain-analgesics and anti-infectives. The company continues to enjoy a dominant position in these segments.

 

• Strong presence in the US and other regulated markets with robust specialty products portfolio: The US, which contributed 32% to revenue in the first half of fiscal 2025, is among the key geographies for Sun Pharma. The company continues to be among the top 15 generic pharmaceutical companies in the US. It has a robust product pipeline and had filed 643 abbreviated new drug applications (ANDAs) and 64 NDAs, of which 105 ANDAs and 13 NDAs were pending approvals from the US Food and Drug Administration (FDA) as on September 30, 2024. With extensive R&D over the past several years, Sun Pharma has established a robust portfolio of specialty products in the US and other regulated markets. The company launched its complex generic product, Lenalidomide (gRevlimid), in the US in fiscal 2023, which has supported growth even amidst pricing pressure in the US generics segment. Successful launch of Deuruxolitinib, post resolution of litigation, will strengthen specialty product offerings over the medium term. Healthy market position in other regulated markets of Europe, Japan (currently undergoing pricing pressure), Canada and Australia is supported by the company’s strength in the specialty products, generics, and OTC segments.

 

• Strong financial risk profile: Aided by healthy adjusted networth and moderate debt, adjusted gearing was low at 0.05 time as on September 30, 2024. Large cash accrual will suffice to cover moderate capex and incremental working capital requirement, thus keeping the capital structure comfortable over the medium term. Debt protection metrics were healthy, with debt to operating profit before depreciation, interest and tax (OPBDIT) and adjusted interest coverage ratios at around 0.1 time and over 50 times, respectively, for the first half of fiscal 2025, and CRISIL Ratings expects these metrics to remain steady over the medium term. While large cash flow and sizeable liquid surplus will ensure strong financial flexibility, any substantial, debt-funded capex will be monitorable.

 

Weaknesses:

• Exposure to regulatory risk: Sun Pharma faces regulatory risk, with instances of adverse observations for its plants. In December 2022, the US FDA issued an import alert for the company’s facility in Halol, Gujarat. This will impact sales from the facility, until the import alert is resolved, as supplies to the US from Halol accounted for nearly 3% of the consolidated revenue in fiscal 2022. Furthermore, three of its facilities (Toansa in Punjab; Dewas in Madhya Pradesh; and Poanta Sahib in Himachal Pradesh) remain under import alert and subject to certain clauses of a consent decree with the US FDA. In June 2024, the company received a warning letter from US FDA for its Dadra facility, summarising violations with respect to Current Good Manufacturing Practice (cGMP) regulations. Resolution of pending regulatory issues and sustained compliance remain monitorable. CRISIL Ratings notes that Sun Pharma provided for a sizeable settlement amount in the last quarter of fiscal 2022, for alleged violation of antitrust laws with respect to ANDAs for three drugs: Valganciclovir, Valsartan and Esomeprazole. This settlement is without any admission of guilt or wrongdoing. CRISIL Ratings also understands that Sun Pharma is engaged in other ongoing litigations and there are tax liabilities under dispute as well, the impact of which may not be ascertainable at present. However, any continuing sizeable settlements or adverse regulatory outcomes materially impacting cash surplus will be monitorable.

 

• Susceptibility to intense competition: Sun Pharma faces intense competition in the US generics market with the introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by the US FDA, and healthcare cost-containment measures undertaken by the US government. Also, players in the US and Europe remain vulnerable to pricing pressure on account of entry of several cost-competitive Indian players. Increasing competition in international markets and R&D cost could also constrain the operating margin.

Liquidity: Superior

CRISIL Ratings expects annual cash accrual of Rs 8,000-8,500 crore to be  sufficient to cover near-term debt obligation and incremental working capital requirement. Organic capex is expected to remain moderate at USD 200-250 million annually and is likely to be funded through a mix of cash accrual and liquid surplus. Liquid surplus was strong at over Rs 22,000 crore as on September 30, 2024. Any significant payout towards legal or regulatory claim settlements or large acquisition will remain monitorable.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that the ESG profile of Sun Pharma supports its already strong credit risk profile.

 

The pharmaceutical sector can have a significant impact on the environment on account of greenhouse gas emissions, water use and waste generation. The social impact of the sector is characterised by the effect on the health and wellbeing of its consumers on account of its products, and on employees and local community on account of its operations.

 

Key ESG highlights:

• The company targets reduction of carbon emissions by 35% by 2030 (for scope 1 and scope 2 emissions) and water consumption by 10%, by 2025 from the base year of 2020. It was able to reduce its combined scope 1 and 2 emissions by 22% and water consumption by 31% in fiscal 2024 with respect to the base year. It has also set a target of disposing 30% of hazardous waste via co-processing by 2025, and manged to dispose 28% of hazardous waste disposal through this route in fiscal 2024.
• The company also intends to maximise energy consumption from renewable sources. In fiscal 2023, 45% of the total energy consumed was from renewable sources.
• Sun Pharma has a track record of resolution of sexual harassment cases. However, gender diversity remains marginally lower than industry peers, with women forming only 8% of the total workforce in fiscal 2024. The company focuses on upskilling the workforce through training.
• The governance profile is characterised by over 50% of its board comprising independent directors and split in chairman and CEO positions. The company also has in place an investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor.

Outlook: Stable

Sun Pharma will continue to benefit from healthy revenue growth in the Indian formulations, specialty business and international generics markets; driven by its strong position, diverse geographical base, and comfortable product pipeline. Robust revenue growth and strong profitability will ensure financial risk profile remains comfortable over the medium term, supported by large cash accrual and substantial cash surplus.

Rating sensitivity factors

Downward factors:

• Any sizeable revenue decline, or operating profitability dropping below 15-17%
• Any stretch in working capital cycle or large, debt-funded capex or acquisitions impacting debt metrics; for instance, debt to OPBDIT in excess of 0.7-0.9 time
• Any adverse regulatory outcome, leading to significant payouts for settlement of claims, impacting liquidity and debt metrics

About the Company

Sun Pharma was formed as a partnership in 1982 in Vapi, Gujarat, to manufacture drugs. It was reconstituted as a limited company in 1993. Mr Dilip Shanghvi is the promoter. Sun Pharma is one of the largest Indian pharmaceutical companies, with a leading position in the high-growth chronic segments. Its product mix comprises formulations and bulk drugs, with the former accounting for nearly 95% of revenue. Product acquisitions undertaken by the company have helped establish its global specialty business. Acquisitions made in the generics business helped in broadening the global product basket and enhance presence in key geographies.

 

In the first half of fiscal 2025, the company reported revenue of Rs 25,944 crore (Rs 24,133 crore in the corresponding period of fiscal 2024) and net profit of Rs 5,876 crore (Rs 4,398 crore).

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	48,560	43,951
Adjusted profit after tax (APAT)*	Rs crore	9,457	8,038
APAT margin	%	19.5	18.3
Adjusted debt/Adjusted networth*	Times	0.05	0.13
Interest coverage	Times	60.99	72.15

*Adjusted for intangibles and goodwill amortisation

Any other information: Not applicable