Detailed Rationale

CRISIL Ratings has continued its rating on the long-term bank facilities of Suven Pharmaceuticals Ltd (SPL; part of suven group) on 'Rating Watch with Positive Implications’; the short-term rating has been reaffirmed at 'CRISIL A1+'.

 

CRISIL Ratings had placed the long-term rating on SPL on “Watch with Positive Implications” on March 11, 2024, following their announcement for the scheme of amalgamation of Cohance Lifesciences Ltd (CLL) into and with SPL subject to necessary statutory and regulatory approvals including the approvals from the National Company Law Tribunal, the stock exchanges, Securities and Exchange Board of India (SEBI) and the shareholders and creditors of each of the companies. The proposed amalgamation is expected to create a diversified contract development and manufacturing organisation (CDMO) with three engines of growth – pharmaceutical CDMO, specialty chemical CDMO and active pharmaceutical ingredients (APIs; including formulations). Further, it is expected to result in multiple synergy benefits that can help accelerate growth and improve margins.

 

Currently, company has received approvals from stock exchanges and SEBI and has approached NCLT for the approval and hearing is awaited.

 

CRISIL also has taken note of the ongoing acquisition in Sapala Organics Pvt Ltd (SOPL) where the management intends to acquire 100% of the stake and has already acquired 51% on a fully diluted basis for a consideration of Rs. 229.5 crores funded fully from the internal accruals/cash reserves.

 

CRISIL Ratings will continue to keep a close watch on the overall financial performance of the group, including the impact of this amalgamation on its business and financial risk profiles. The ratings shall be removed from watch and a final rating action will be taken once there is more clarity on these aspects and transactions. Any material impact on the credit profile of the company will remain a key monitorable over the medium term.

 

The ratings continue to reflect Suven group’s established market position, and its strong financial profile. These strengths are partially offset by working capital intensive operations and exposure to customer concentration risk.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of SPL with its 100% subsidiary, Suven Pharma Inc & Casper Pharma Pvt Ltd. This is because these companies, collectively referred to as the Suven group, have a common management team, are in similar lines of business, and have operational linkages and fungible cash flow.

 

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

The group has established market position in the contract research and manufacturing services (CRAMS) segment and is among the top five players in India who supply high-end intermediaries to innovators. Further, long-term contracts with the established and reputed principals also aid steady order flow. Market position has remained strong with company reporting Rs. 1340 crores of topline in fiscal 2023 and Rs. 820 crores in 9m of the ongoing fiscal. CRISIL expects the market position to strengthen further with the completion of amalgamation with CLL.

 

Strong financial risk profile

Financial risk profile has remained strong with minimal reliance on external debt and healthy networth base. Networth remained strong at around Rs. 1733 crores as on March 31, 2023 and is estimated to be around Rs. 2100-2300 crores by the end of the ongoing fiscal. Capital structure also continues to be strong and will continue at less than 0.05 times in the medium term. Debt protection metrics also remained robust with interest coverage of above more than 40 times and is expected to continue strong in the medium term on back of no debt funded capex in pipeline.

 

Weakness:

Working capital-intensive operations

Operations remain moderately working capital intensive with gross current assets (GCAs) of 160 days as on March 31, 2023. The higher GCA days are mainly due to the higher inventory levels of 4-5 months due to long time taken for product approvals and higher inventory maintained to cater the bulk orders from the customers.

 

Exposure to customer concentration risk

The top five customers contribute a substantial share of the revenue, exposing the company to customer concentration risk.

Liquidity: Strong

Net cash accruals estimated to be above Rs. 300 crs in fiscal 2025 against which the company doesn’t have any term debt obligations. Average bank limit utilization was moderate at 83% on average for the 12 months ended November 2023.

 

Liquidity is further supported by investments of around Rs.864 crore in Debt Mutual funds and Bonds as on June 30, 2024.

 

Environment, social, and governance (ESG) profile

 

CRISIL Ratings believes Suven’s ESG profile 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 sector’s social impact is characterized by impact on the health and wellbeing of consumers on account of its products and on employees and local community on account of its operations.

 

Key ESG highlights

• Suven has been handling multiple projects to reduce Green House Gas emissions. The implemented or ongoing project includes installation of In-house Solar power generation system, replacing old equipment with energy-efficient equipment, replacing CFL bulbs with LED, implementing latest technologies etc.
• Suven has successfully implemented a comprehensive Zero Liquid Discharge(ZLD) program, which has the objective of completely eliminating liquid waste from operations. This program encompasses all aspects of business activities and is specifically designed to minimize the discharge of pollutants into the environment. The ZLD system treats wastewaters, recycling them for reuse in utilities, thus helping to decrease fresh water consumption. To achieve this, significant investments have been made in advanced treatment and discharge systems. The water processed through effluent treatment plant(s) is efficiently treated and subsequently utilized for in-house plantation purposes. Furthermore, Suven maintains an ongoing commitment to continuous improvement, constantly exploring innovative approaches to enhance our processes and further reduce environmental footprint.
• It has implemented gender diversity and inclusion policy, human rights policy, suppliers code of conduct, prevention of sexual harassment policy as well as zero tolerance for child labor.
• Suven has adequate governance structure, it has established a grievance redressal policy. Anyone associated with the company can contact wbm@suvenpharm.com to report their concerns. The company will review the matter and, based on its nature, forward it to the appropriate department head at the relevant site. The concerned department will then reach out to the stakeholder, discuss the issue, and work on resolving it promptly.
• Suven has also designated site-level administrators to address and resolve any concerns from local communities. Suven also has board-level ESG committee to provide oversight and direction, and to monitor the ESG strategy and action plans.

 

There is growing importance of ESG among investors and lenders. Suven’s continued 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.

Rating Sensitivity Factors

Upward factors

• Significant strengthening of SPL’s market position and production portfolio with the ongoing amalgamation leading to net cash accrual of Rs 400 crore.
• Further strengthening of financial risk profile and liquidity

 

Downward factors

• Steep fall in revenue along with dip in operating margin resulting in lower net cash accrual of under Rs 150-200 crore.
• Higher than expected debt-funded capital expenditure along with stretch in the working capital cycle, leading to weakening of financial risk profile and liquidity

About the Group

Incorporated in November 2018, SPL is a biopharmaceutical company specialising in New Chemical Entity (NCE)-based CRAMS for global life science companies. It is promoted by Mr Venkateshwarlu Jasti and is based out of Hyderabad, Telangana. SPL is among the top five players in India who supply high-end intermediaries to innovators. The company got listed on the Bombay Stock Exchange and National Stock Exchange on March 09, 2020.  The management of the group have recently been changed with acquisition of significant stake of 50.10% of SPL by Berhyanda Limited (fully owned subsidiary of Advent International) as part of its strategy to build a leading end-to-end Contract Development & manufacturing Organization (CDMO) and merchant API player servicing the pharma and specialty chemical markets 

 

Suven Pharma Inc. is a wholly owned subsidiary of SPL. It is an SPV for undertaking various business opportunities in the Pharma Industry. Suven Pharma Inc. has 7% stake in Raisin Aggregator LP, which is a New Jersey, USA based pharmaceutical company.

 

Casper Pharma Pvt Ltd is also a wholly owned subsidiary of SPL which was acquired by SPL on April 22nd 2022. Casper Pharma has a large manufacturing unit in Hyderabad dedicated to the manufacture of solid and liquid oral pharmaceuticals for USA and regulated markets.

 

For the three months through June 2024, the group reported consolidated revenue and profit after tax (PAT) of Rs 230.69 crore and Rs 60.77 crore, respectively, against Rs 347.55 crore and Rs 120.60 crore, respectively, in the corresponding period previous fiscal

Key Financial Indicators

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs crore	1051.35	1,341.29
Reported profit after tax	Rs crore	300.28	411.29
PAT margins	%	28.56	30.66
Adjusted Debt/Adjusted Networth	Times	0.02	0.04
Interest coverage	Times	62.77	30.66

 

Any other information: Not Applicable