| Sun Pharmaceutical Industries Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Sun Pharmaceutical Industries Limited (Sun Pharma).
The ratings continue to reflect leadership position of Sun Pharma in the domestic formulations segment, ramp-up in the global specialty business, strong presence in the regulated generics markets, an expanding share in the rest-of-the-world (excluding India and US) markets, and robust financial risk profile. These strengths are partially offset by exposure to intense pricing pressure and regulatory risks in the domestic and regulated markets.
Consolidated revenues for the first nine months of fiscal 2022 grew by 17% to Rs 29,208 crore, driven by all-round growth across markets like India, US, emerging markets and Rest of World (RoW) markets. The revenue growth was healthy, given lower base of fiscal 2021 due to nationwide lockdown on account of the Covid-19 pandemic and subsequently lower doctor visits and elective surgeries during the first wave of the pandemic. The operating margin was healthy at 27.6% for the first nine months of fiscal 2022 supported by healthy revenue growth, despite increasing selling, distribution and travel costs and continued pricing pressure in the US generics market. The growth in the US market will be contingent upon the successful launch of generic products; the company had an abbreviated new drug application (ANDA) pipeline of 88 products and 13 new drug applications (NDA) awaiting USFDA approval as on December 31, 2021. Further, ramp-up in sales of launched specialty products such as Ilumya, Winlevi, Cequa will be a key driver for growth in the US market. As per Crisil estimates, the operating margin is expected to sustain at 23-34% over the medium term. The margin is, however, constrained due to pricing pressure in the US generics market, marketing expenses related to specialty products wherein the commensurate returns will accrue after a lag, and exposure to foreign currency risks.
The financial risk profile continues to be strong, marked by high tangible networth of Rs 49,536 crore and sizeable liquid surplus of Rs 14,425 crore as on September 30, 2021. Capital expenditure (capex), including routine maintenance, is expected at Rs 1,500-2,000 crore for fiscal 2022. Capex and working capital requirements are likely to be funded entirely through cash accrual and liquid surplus, and hence financial risk profile is expected to remain strong over the medium term. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Sun Pharma and its 102 subsidiaries, joint ventures (JVs), associates and their subsidiary, collectively known as Sun Pharma, as the companies 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 investments required by them. Further, 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:
Sun Pharma is the market leader in the domestic formulations segment, with a market share of about 8.2% as on December 31, 2021 (Source: All India Organisation of Chemists and Druggists MAT Data for Dec-2021). Leading position in the chronic segment is backed by specialisation in technically complex products, strong brand equity and large product portfolio. 28 of the company’s brands are in the top 300 in the domestic market. It ranks among the top 10 consumer healthcare companies in India and enjoys strong brand equity for certain key products such as Revital (vitamin and mineral supplement) and Volini (pain reliever). These brands give a competitive edge and also create a foundation for establishing a global over-the-counter (OTC) business.
Sun Pharma markets its OTC products in over 20 international markets. Its key therapeutic areas in domestic formulations are cardiology, neurology and gastroenterology, anti-infectives and anti-diabetic. The company continues to enjoy a dominant position in these segments. Its growth rate in the domestic business is expected to be above 12% over the medium term as per CRISIL rating estimates.
The US, which contributed 30% of revenue for the first nine months of fiscal 2022, is among the key geographies. The company has a robust product pipeline – as on December 31, 2021, it had 512 approved abbreviated new drug applications (ANDAs) and 88 pending approvals. It also had 53 approved NDAs while 13 NDAs await approval from United States Food and Drug Administration (USFDA). After sustained research and development on the specialty pipeline, key products such as Ilumya and Cequa were commercialised in the US. The company has recently commercialized Winlevi – an in-licensed product for acne treatment – in the US market. However, growth in the US may be impacted by the intense pricing pressure prevalent in the generics segment. The company continues to be among the top 10 generic pharmaceutical companies in the US market. The position in other regulated markets of Europe, Japan, Canada and Australia is supported by its strength in the generics, branded, and OTC segments.
Sun Pharma is one of the largest Indian companies in emerging markets with presence in about 80 countries and manufacturing facilities in seven. Revenue from emerging markets account for about 18% of overall consolidated revenue -- with key contributors being Russia, Romania, South Africa, Brazil and Mexico. With about 14% revenue from the rest of the world (excluding India, US and emerging markets), Sun Pharma has presence in all major markets of Western Europe, Canada, Japan, Israel and Australia, supported by its diverse product portfolio that includes injectables, hospital products as well as products for the retail market.
Adjusted gearing, healthy at 0.1 time as on March 31, 2021, is expected at a similar level over the medium term. Debt protection metrics are healthy with estimated net cash accrual to total debt and interest coverage ratios of 0.72 time and 64.33 times, respectively, for fiscal 2021. As the large cash accrual will be sufficient to meet capital expenditure (capex) and, to some extent, working capital requirement, capital structure is expected to remain comfortable over the medium term. Large cash flows and sizeable cash and liquid investments of about Rs 14,425 crore as on September 30 31, 2021 (on a consolidated basis) lend strong financial flexibility. Any significant payouts towards legal or regulatory claim settlements or large acquisition will remain a key monitorable
Weaknesses:
Sun Pharma is exposed to regulatory risks, with instances of adverse observations for its plants. In December 2019, the facility at Halol was audited by USFDA and received eight observations under Form 483. The audit was later classified as Official Action Indicated by USFDA, implying that new US approvals from the facility will be on hold till it gets reinspected, while already approved products will not be impacted. US supplies from Halol accounts for 3-4% of the total revenue. Further, three 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 USFDA. Resolution of pending regulatory issues and sustained compliance will remain key monitorables.
Sun Pharma faces intense competitive pressure in the US generics market because of aggressive defence tactics by innovator companies through introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by USFDA, and healthcare cost-containment measures by the US government. Also, players in the US and Europe are vulnerable to pricing pressure on account of entry of many cost-competitive Indian players. Increasing competition in international markets and research and development cost are likely to constrain the operating margin.
Nevertheless, the company has a pipeline of complex generics and speciality products. Successful launch of these products will be critical to mitigate the pricing pressures observed in the existing portfolio. |
Liquidity: Superior Cash accrual is projected at over Rs 5,000 crore per annum, more than sufficient to repay yearly debt of about Rs 181 crore in fiscals 2022 and 2023 as per CRISIL Rating estimates. Liquid surpluses were about Rs 14,425 crore as on September 30, 2021. Organic capex is expected to remain moderate at Rs 1,500 crore, which is likely to be funded through a mix of cash accrual and liquid surpluses.
Environment, social and governance (ESG) profile Sun Pharma’s ESG profile supports its already strong credit risk profile.
The pharmaceutical sector has significant impact on the environment owing to high water consumption and waste generation and also greenhouse gas emission. The social impact of this sector is characterised by health hazards leading to higher focus on employee safety and wellbeing and the impact on local community, given the nature of its operations.
Sun Pharma has continuously focused on mitigating its environmental and social risks
ESG highlights:
There is growing importance of ESG among investors and lenders. Sun Pharma’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 strong market position, diverse geographical base and comfortable product pipeline. Healthy revenue growth and strong profitability will ensure that financial risk profile remains robust, supported by large cash accrual and substantial cash surplus. |
Rating Sensitivity factors Downward factors
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About the Company Sun Pharma was formed as a partnership firm 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 both formulations and bulk drugs, with formulations accounting for nearly 95% of revenue. To focus on specialty segments, the company has undertaken product acquisitions, which helped establish its global specialty business. The company has, in the past, undertaken a few acquisitions in the generics business, which helped broaden its global product basket and enhance its presence in key geographies.
For the first nine months of fiscal 2022, operating income was Rs 29,208 crore and profit after tax (PAT) was Rs 5,617 crore, as against Rs 24,975 crore and Rs 1,430 crore, respectively, for the corresponding period of fiscal 2021. |
Key Financial Indicators
*Adjusted for goodwill and intangible amortisation |
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. 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)
^Fully interchangeable with working capital demand loan @All facilities are interchangeable with non-fund-based limit #Fully interchangeable with bank guarantee $Fully interchangeable with letter of credit |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||||||||||||||||||||||||||
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^Fully interchangeable with working capital demand loan
@All facilities are interchangeable with non-fund-based limit
#Fully interchangeable with bank guarantee
$Fully interchangeable with letter of credit
Criteria Details
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