| Zydus Healthcare Limited | ||||||
| Rating outlook revised to 'Positive'; 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 revised its rating outlook on the long-term bank facilities of Zydus Healthcare Limited (ZHL) to ‘Positive’ from ‘Stable’; and reaffirmed the rating at 'CRISIL AA+’; the short-term rating has been reaffirmed at ‘CRISIL A1+'.
ZHL’s operating income grew at about 11% year-over-year in fiscal 2021, despite lower prescription-based sales in the first quarter amidst the pandemic and associated lockdown. Operating income is expected to witness sharp growth in fiscal 2022, as compared to lower base last fiscal. ZHL has realigned its generic business by demerging it to a subsidiary while it continues to focus on branded formulations. Operating margin was healthy at 31% in fiscal 2021 and should remain at a similar level over the medium term. The financial risk profile remains strong with low leverage and almost all the debt pertains to preference share capital from the parent.
The ratings continue to reflect the strategic importance of ZHL to Cadila Healthcare Ltd (Cadila Healthcare; ‘CRISIL AA+/Positive/CRISIL A1+’; part of the Zydus Cadila group), and the strong business and financial support it receives from the parent. The ratings also factor in healthy operating margin leading to strong debt protection metrics. These strengths are partially offset by exposure to regulatory risks. |
Analytical Approach CRISIL Ratings has applied its criteria for notch-up of ratings based on parent support and has adjusted goodwill, net of amortisation, to arrive at adjusted networth. Preference share capital of Rs 1,007 crore as on March 31, 2021 is treated as debt and has been fully redeemed in the current fiscal. |
Key Rating Drivers & Detailed Description Strengths:
Cadila Healthcare, the flagship company of the Zydus Cadila group, has high operational, managerial, and financial integration with ZHL. In fiscal 2021, ZHL accounted for 21% and 30% of Cadila Healthcare’s consolidated revenue and operating profit, respectively. In fiscal 2021, revenue grew 11% over the previous fiscal. Established brands, large and therapeutic-focused field force, and product launches are expected to support growth over the medium term.
Led by the Zydus Cadila group’s leadership position in the domestic formulations market and higher share of chronic therapies, the operating margin should remain healthy at 31% in fiscal 2022. Furthermore, ZHL’s unit in Sikkim is eligible to avail of fiscal benefits under the industrial policy of Sikkim till fiscal 2026.
Debt was Rs 1,007 crore as on March 31, 2021, comprising entirely of preference share capital from the parent. Adjusted networth was healthy at Rs 1,591 crore as on March 31, 2021, and is expected at Rs 1,800-2,200 crore over the medium term. The financial risk profile will remain strong over the medium term, given the healthy operating margin and absence of any capital expenditure (capex).
Weaknesses:
Since fiscal 2013, drug prices for over 500 medicines have been regulated under the Drug Price Control Order, 2013. Drugs under acute and chronic therapies are added to the National List of Essential Medicines regularly. In fiscal 2017, the Zydus Cadila group witnessed slower growth in revenue (9%) in the domestic market because of price revisions. |
Liquidity: Strong ZHL has strong liquidity, driven by healthy cash accrual, nil term debt obligation, and support from Cadila Healthcare. Liquid surplus was at Rs 280 crore as on March 31, 2021. The bank limit of Rs 300 crore was utilised negligibly as incremental working capital requirement was funded through internal accrual and credit from suppliers. The company has a moderate working capital cycle, as reflected in receivables and inventory of 26 and 78 days, respectively, as on March 31, 2021. It does not plan any major capex over the medium term. |
Outlook: Positive ZHL will continue to benefit from its strong market position in the domestic formulations segment. It will remain strategically important to Cadila Healthcare, and will continue to benefit from strong support from the parent. The ‘Positive’ outlook is in line with parent, Cadila Healthcare’s ‘Positive’ outlook. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company ZHL was set up in 2007 as a partnership between Cadila Healthcare (96% ownership), its wholly owned subsidiary German Remedies Ltd (2%), and Cadila Healthcare Staff Welfare Trust (2%). In February 2016, ZHL was amalgamated with Cadila Healthcare, which held the entire stake in the amalgamated entity. In November 2016, the human formulations business under the group was consolidated under ZHL. Based in Mumbai, ZHL manufactures formulations for the domestic market. |
About Cadila Healthcare Cadila Healthcare was formed in 1995, following a split in Cadila Laboratories Ltd (Cadila Laboratories), which was set up by Mr Ramanbhai Patel in 1952. Mr Indravadan Modi and his family's share in Cadila Laboratories was moved to a company called Cadila Pharmaceuticals Ltd. The division that was managed by Mr Ramanbhai Patel’s son, Mr Pankaj Patel, was renamed Cadila Healthcare. In 2000, it got listed on the Bombay Stock Exchange. As on September 30, 2021, the promoters held 74.88% stake in Cadila Healthcare, foreign portfolio investors held 4.11%, and the public and others held the balance. |
Key Financial Indicators
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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 ** Fully interchangeable with bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Cash Credit* | HDFC Bank Limited | 70 | CRISIL AA+/Positive |
| Cash Credit* | HDFC Bank Limited | 40 | CRISIL AA+/Positive |
| Letter of Credit** | HDFC Bank Limited | 10 | CRISIL A1+ |
* Fully interchangeable with working capital demand loan
** Fully interchangeable with bank guarantee
This Annexure has been updated on 03-Dec-2021 in line with the lender-wise facility details as on 29-Nov-2021 received from the rated entity.