Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long-term bank facilities and non-convertible debentures of Zydus Lifesciences Ltd (Zydus Life; part of the Zydus group) and has reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities and commercial paper programme.

 

The ratings continue to reflect the established position of the Zydus group in the branded generics market in India and the expected benefits from growth in the wellness segment. The ratings also factor in the group’s growing presence in international markets and strong financial risk profile. These strengths are partially offset by exposure to risks related to unfavourable regulatory changes, increasing competition and price erosion in the US generics market.

 

Consolidated revenue grew 13% on-year in fiscal 2024 and 20% in the first half of fiscal 2025, led by high sales growth in the US on the back of sustained volume expansion in base business, execution success in new product launches and supported by a benign pricing environment. International markets business which comprises of different countries of emerging markets and Europe, witnessed high growth in sales even amid geopolitical challenges in few economies, while revenue from the domestic market grew steadily, benefitting from healthy volume growth, new launches, high-value therapies and increasing chronic share (41.8% as per IQVIA MAT on September 30, 2024; 400 basis points (bps) expansion over the last three years). Consolidated operating margin improved to 27.5% in fiscal 2024 and to 31.0% in the first half of fiscal 2025 on the back of better business mix and stable input costs. This is despite sustained focus on research and development (R&D).

 

CRISIL Ratings expects Zydus Life’s business risk profile to continue to improve on the back of healthy revenue growth of 10-12% per annum led by new product launches across markets and ramp-up in sales of new chemical entities and biosimilars while sustaining strong operating margin at 26-28%, leading to higher cash accrual.

 

Zydus Life’s gross debt was lower at Rs 150 crore as on September 30, 2024 (Rs 769 crore as on March 31, 2024), owing to strong cash accrual. Liquidity remained superior and the company reported net cash (cash and equivalent; net of debt) of Rs 2,591 crore as on September 30, 2024. The ratings also factor in the expectation of sustenance of Zydus Life’s healthy financial risk profile, going forward, with low reliance on external borrowing, leading to net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) ratio sustaining at 0.2-0.3 time over the medium term, after factoring in organic capital expenditure (capex) of Rs 900-1,000 crore and moderate inorganic growth plans.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Zydus Life and its 44 subsidiaries and step-down subsidiaries, collectively referred to as the Zydus group, as all these entities operate in the pharmaceutical and related industries and have significant operational linkages and common management. For three joint ventures (JVs), CRISIL Ratings has followed a moderate integration approach factoring in the share of profit from the JVs and any incremental investment required by them. Also, CRISIL Ratings has amortised intangible assets and goodwill consolidated on earlier acquisitions over five fiscals and on the acquisition of Heinz India Pvt Ltd (HIPL) over 10 years. Both profit after tax (PAT) and networth are adjusted to that extent.

 

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 in the domestic market: The Zydus group is one of the leading players in the domestic formulations market, and its domestic sales accounted for 25% of consolidated revenue in the first half of fiscal 2025. The group holds leading positions in progressive therapies of cardio-diabetology, respiratory, gynaecology, oncology, nephrology and hepatology, which collectively account for around half of the domestic formulations revenue. It has strengthened its marketing team over the past few years, putting greater thrust on market strategies such as growth in the categories, integration of channel partners, supply chain and procurement to improve revenue and cost synergies. The group has a healthy pipeline of innovation portfolio, which will be the growth drivers over the medium term.

 

• Growing presence in international markets: Business prospects are supported by growing presence in the US generics markets, which accounted for 49% of consolidated revenue in the first half of fiscal 2025. The Zydus group was the fifth-largest pharmaceutical company in the US generics market as per IQVIA MAT September 2024. It had 412 approvals (including 26 tentative approvals) and filed 473 abbreviated new drug applications (ANDAs) as on September 30, 2024. Healthy pace of filings and approvals in the US, reflected in the strong ANDA pipeline, will strengthen the US business. The group also has established presence in the rest of the world markets such as Brazil, Mexico, Sri Lanka, South Africa, France and Spain, where it reported healthy revenue growth despite geopolitical challenges and adverse macro environment. The rest of the world segment accounted for 10% of the consolidated revenue in the first half of fiscal 2025.

 

• Strong financial risk profile:  The financial risk profile is supported by healthy capital structure and debt protection metrics. Adjusted gearing remained strong at less than 0.1 time as on September 30, 2024, while interest coverage ratio was over 60 times in the first half of fiscal 2025 due to minimal debt. The company repaid its entire long-term debt and lowered its working capital utilisation using the proceeds from the sale of the domestic animal healthcare business in fiscal 2022 and healthy internal accrual. Gross debt was Rs 150 crore and healthy liquidity built-up resulted in net cash position of Rs 2,591 crore as on September 30, 2024. The financial risk profile is expected to remain strong, with net debt to Ebitda ratio sustained at low levels over the medium term, after factoring in moderate capex and inorganic growth plans. Any sizeable debt-funded acquisition or investments may adversely impact the debt metrics and liquidity and hence will remain a key monitorable.

 

Weaknesses:

• Exposure to regulatory risks: The Zydus group remains exposed to regulatory risks in both domestic and international markets, particularly the US. For instance, in October 2019, a warning was issued by the US Food and Drug Administration (US FDA) for the group’s Moraiya plant, which impacted new product approvals. While the US FDA cleared this warning letter in November 2022 and the company has started getting new product approvals, another warning letter was received in the first half of fiscal 2025 for the injectables facility at Jarod, for which the company is undertaking corrective action. Any further regulatory issues related to the group’s facilities in the future could impact revenue and profitability. The ongoing litigation by the anti-trust division of the US Department of Justice on industry generic players regarding price-collusion allegations is a monitorable. Furthermore, any price-control measures of the government in the branded domestic formulations segment may weaken growth.

 

• Susceptibility to competition and stretched working capital cycle: The group faces intense competition in regulated markets, where innovator companies engage in aggressive defence tactics and there are several cost-competitive Indian players. Generics players in regulated markets are affected by severe price erosion given the commoditised nature of products and government pressure to lower prices. The company’s ability to keep launching new products mitigates this risk. Strong bargaining power of distributors in the US leads to large working capital requirement; gross current assets were at 201 days as on March 31, 2024. However, ample liquidity and high financial flexibility should be sufficient to meet working capital requirement.

Liquidity: Superior

Healthy cash and equivalent (including investments in mutual funds) of Rs 2,741 crore as on September 30, 2024, and strong annual cash generation support liquidity. Besides, the company has fund-based bank limit of about Rs 3,400 crore, which was moderately utilised at less than 10% for the 12 months through September 2024. Annual cash accrual of over Rs 4,000 crore will be more than sufficient to meet yearly capex of Rs 900-1,000 crore and to fund inorganic growth plans. The company does not have any term debt obligation, which supports liquidity.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes Zydus Life’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 (GHG) emissions, water use and waste generation. The social impact of the sector is characterised by impact 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:

• Zydus Life has undertaken focused efforts towards reducing its GHG emissions. Its GHG emissions came down by 3% in fiscal 2024.
• The company has been recycling and co-processing its hazardous waste. Waste intensity declined 7% in fiscal 2024 and recycling/co-processing of total waste stood at 61% of the total waste generated.
• It has a track record of customer grievance redressal and resolution of sexual harassment cases. However, the gender diversity remained marginally lower than industry peers, with women employees forming just 8% of the permanent workforce in fiscal 2024. The company is committed to increasing this to 12% by fiscal 2026.
• The governance structure is adequate, with over half of the board comprising independent directors. The company also has an investor grievance redressal mechanism, whistleblower policy and extensive disclosures.
   

There is growing importance of ESG among investors and lenders. The commitment of the company 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

The Zydus group will maintain its diversified revenue profile across geographies and healthy cash accrual over the medium term. The financial risk profile is expected to remain strong with healthy capital structure and debt protection metrics.

Rating sensitivity factors

Downward factors:

• Sharp decline in operating margin due to increased competition, unfavourable regulatory developments or lower-than-expected sales across business segments
• Higher-than-expected debt undertaken to fund large acquisitions, capex and working capital cycle, with net debt to Ebitda ratio above 0.5 time on a steady-state basis
• Any significant payout towards the ongoing anti-trust litigation or any other adverse regulatory developments impacting the liquidity and debt protection metrics

About the Company

Cadila Laboratories was set up in 1952 by Mr Raman Patel and Mr Indravadan Modi. Cadila Healthcare was incorporated in 1995 following the split of Cadila Laboratories, with Mr Modi and his family's share being moved to a new company. The division that was managed by Mr Raman Patel’s son, Mr Pankaj Patel, was renamed Cadila Healthcare, which was renamed Zydus Life in February 2022. The company is currently under the leadership of Dr Sharvil Patel, a third-generation promoter. Zydus Life got listed on the Bombay Stock Exchange in 2000. Over the years, Zydus Life has grown to become one of the leading pharmaceutical companies in India. It also has a growing presence in the regulated markets, particularly the US, and is one of the top five players in the US generics market in terms of prescriptions. Other segments include emerging markets formulations, consumer wellness, animal healthcare and bulk drugs. The group has a network of manufacturing facilities which comprises of 18 formulation manufacturing units, 1 animal health unit, 6 bulk drug manufacturing units, 3 biologics units, 6 vaccine units and 4 consumer product facilities. Moreover, the company has eight R&D centres. As on September 30, 2024, 74.98% stake in Zydus Life was held by the promoters.

 

For the half year ended September 30, 2024, the company reported profit after tax (PAT) of Rs 2,402 crore on total income from operations of Rs 11,444 crore (Rs 1,939 crore and Rs 9,508 crore, respectively, in the corresponding period of the previous fiscal).

Key Financial Indicators

Particulars	Unit	2024	2023
Operating income	Rs crore	19,547	17,237
Adjusted PAT*	Rs crore	3,229	1,659
Adjusted PAT margin*	%	16.5	9.6
Adjusted debt / adjusted networth*	Times	0.04	0.07
Interest coverage	Times	70.7	39.0

*Adjusted for goodwill and intangibles amortisation

Any other information: Not Applicable