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 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 to regulatory risks in the domestic and regulated markets.

 

Consolidated revenue grew 13% on-year in fiscal 2023 and 11% on-year for the first half of fiscal 2024, driven by double-digit growth in the US formulations market. This was led by ramp-up in the sale of specialty products as well as healthy growth in the emerging markets, even as growth in the domestic market remained moderate on a high base of fiscal 2022. Operating margin was healthy at 26.7% in fiscal 2023 and 27.0% in the first half of fiscal 2024 supported by healthy revenue growth and increasing contribution of the specialty products to the revenue mix (16.2% in fiscal 2023). CRISIL Ratings expects the revenue to grow at high single-digit annually over the medium term led by ramp-up in sales of key specialty products including timely launch of Deuruxolitinib. Also, the operating margin is expected to sustain at 25-26% over the medium term. The margin will, however, be constrained by the expected increase in research and development (R&D) expenses, lag in the accrual of commensurate returns on the specialty products vis-à-vis its marketing expenses, and exposure to foreign currency risks.

 

Financial risk profile remains strong, marked by robust adjusted networth of over Rs 49,000 crore, moderate debt levels, and sizeable cash surplus of over Rs 18,000 crore as on September 30, 2023. Debt increased to Rs 6,198 crore as on March 31, 2023, from Rs 931 crore as on March 31, 2022, as the company borrowed temporarily to fund the acquisition of Concert Pharmaceuticals Inc in the last quarter of fiscal 2023. However, Sun Pharma has repaid part of the debt, and debt outstanding reduced to Rs 1,488 crore as on September 30, 2023. Financial risk profile is expected to remain strong over the medium term with moderate annual capital expenditure (capex) of USD 200-250 million towards routine maintenance. Working capital requirement 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 investments 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 31% to revenue in the first half of fiscal 2024), with a market share of about 8.4% as on September 30, 2023 (Source: All India Organisation of Chemists and Druggists MAT Data for Sep-2023). 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 31 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 certain key products such as Revital (vitamin and mineral supplement) and Volini (pain reliever). These brands give it a competitive edge and also create a foundation for establishing a global over the counter (OTC) business. Sun Pharma sells its OTC products in over 20 international markets. Its key therapeutic areas in domestic formulations are cardiology, neurology, gastroenterology, anti-infectives and anti-diabetic. 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 31% to revenue in the first half of fiscal 2024, is among the key geographies for Sun Pharma. The company continues to be among the top 10 generic pharmaceutical companies in the US market. It has a robust product pipeline in the US and had filed 619 abbreviated new drug applications (ANDAs) and 67 NDAs, of which 93 ANDAs and 13 NDAs were pending approvals from the US Food and Drug Administration (FDA) as on September 30, 2023. 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 last fiscal, which has supported growth even amid heightened pricing pressure in the US generics segment. Successful approval and launch of Deuruxolitinib will strengthen specialty product offerings over the medium term. The healthy market position in other regulated markets of Europe, Japan, Canada, and Australia is supported by its strength in the specialty products, generics, and OTC segments.

 

• Strong financial risk profile: Given healthy adjusted networth and moderate debt, adjusted gearing was comfortable at 0.13 time as on September 30, 2023. Large cash accrual will be sufficient to meet moderate capex and incremental working capital requirements and the capital structure is expected to remain 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 of ~0.1 time and over 50 times, respectively, for the first half of fiscal 2024 and CRISIL Ratings expects these metrics to remain at similar levels over the medium term. While large cash flows and sizeable liquid surplus lead to strong financial flexibility, any substantial, debt-funded capex will be monitorable.

 

Weaknesses:

• Exposure to regulatory risks: Sun Pharma is exposed to regulatory risks, 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, which will impact sales from the facility until the import alert is resolved as supplies to the US from Halol accounted for ~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. Resolution of the pending regulatory issues and sustained compliance will be monitorable. CRISIL Ratings notes that Sun Pharma provided for a sizeable settlement amount in last quarter of fiscal 2022 for alleged violation of antitrust laws with respect to its 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 competitive pressure in the US generics market through introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by the US FDA, 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 R&D cost are likely to constrain operating margin.

Liquidity: Superior

CRISIL Ratings expects that the annual cash accrual of over Rs 7,500-8,000 crore will be sufficient to cover near-term debt repayment and incremental working capital requirement. Organic capex is expected to remain moderate at upto USD 200-250 million annually, which is likely to be funded through a mix of cash accrual and liquid surplus. Liquid surplus was strong at over Rs 18,000 crore as on September 30, 2023. Any significant payouts towards legal or regulatory claim settlements or large acquisition will remain monitorable.

 

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 of 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 7% and water consumption by 20% in fiscal 2023 with respect to the base year. It has also set a target of disposing of 30% of hazardous waste through co-processing by 2025, and was able to achieve 18% of hazardous waste disposal through co-processing in fiscal 2023.
• The company also intends to maximise energy consumption from renewable sources. In fiscal 2023, 32% of the total energy consumed was from renewable sources.
• Sun Pharma has a track record of resolution of sexual harassment cases. However, gender diversity remained marginally lower than industry peers, with women employees forming only 7% of the total workforce in fiscal 2023. 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 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 company, 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 to establish its global specialty business. Sun Pharma has, in the past, undertaken a few acquisitions in the generics business, which helped to broaden its global product basket and enhance presence in key geographies.

 

In the first half of fiscal 2024, the company reported revenue of Rs 23,788 crore (Rs 21,714 crore in the corresponding period of fiscal 2023) and net profit of Rs 4,398 crore (Rs 4,323 crore).

Key Financial Indicators

Particulars	Unit	2023	2022
Revenue	Rs.Crore	43,951	38,722
Adjusted profit after tax (APAT)*	Rs.Crore	8,038	2,718
APAT margin	%	18.3	7.0
Adjusted debt/adjusted networth*	Times	0.13	0.02
Interest coverage	Times	72.15	91.71

*Adjusted for intangibles and goodwill amortisation

Any other information: Not Applicable

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	Cash Credit^@	NA	NA	NA	42	NA	CRISIL AAA/Stable
NA	Letter of Credit#	NA	NA	NA	60.5	NA	CRISIL A1+
NA	Bank Guarantee$	NA	NA	NA	15	NA	CRISIL A1+
NA	Proposed Cash Credit Limit	NA	NA	NA	29	NA	CRISIL AAA/Stable
NA	Proposed Letter of Credit	NA	NA	NA	18.5	NA	CRISIL A1+
NA	Proposed Bank Guarantee	NA	NA	NA	11	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	4000	Simple	CRISIL A1+

^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