Detailed Rationale

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

 

The rating upgrade reflects CRISIL Ratings expectations of improvement in Zydus Life’s business risk profile on the back of healthy revenue growth of 10-12% annually led by new product launches across markets and ramp up in sales of  new chemical entities and biosimilars, while sustaining strong operating margin at 22-24%, leading to higher-than-expected cash accrual. The rating action also factors in the expectation of sustenance of Zydus Life’s healthy financial risk profile, going forward, with low reliance on external borrowings leading to net debt to /Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratio sustaining below 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.

 

Zydus Life’s gross debt declined to Rs 150 crore as on September 30, 2023, from Rs 4,653 crore as on September 30, 2021, on the back of strong cash accrual and funds raised from the sale of the domestic animal healthcare business in the second quarter of fiscal 2022. Liquidity remained sizeable and the company reported net cash (cash and cash equivalents net of debt) of Rs 1,639 crore as on September 30, 2023.

 

Consolidated revenue grew 14% on-year in fiscal 2023 and 19% in the first half of fiscal 2024, led by high sales growth in the US that was driven by the launch of few complex limited-competition products. Emerging markets also witnessed high growth in sales even as revenue from the domestic market grew moderately at single digits (on a higher base which includes Covid-related revenue). Consolidated operating margin remained healthy at 22.4% in fiscal 2023 which improved to 27.9% in the first half of fiscal 2024 on the back of high sales of certain complex products, lower input costs and abating pricing pressure in the US generics market. This is despite sustained focus on research and development (R&D).

 

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 company’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 erosions in the US generics market.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Zydus Life and its 44 subsidiaries and stepdown subsidiaries (collectively referred to as the Zydus group) as all these entities operate in the pharmaceutical and related space and have significant operational linkages and common management. For three joint ventures (JVs), CRISIL Ratings follows a moderate integration approach; specifically factoring in the share of profit from JVs and of any incremental investment required by them. 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 top five players in the domestic formulations market, and domestic sales formed 28% of consolidated revenue in the first half of fiscal 2024. The group holds leading positions in progressive therapies of cardio-diabetology, respiratory, gynecology, oncology, nephrology and hepatology which together account for around half of domestic formulations revenues. 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 also has a healthy pipeline of new chemical entities and biosimilars 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 formed 46% of consolidated revenue in the first half of fiscal 2024. The Zydus group was the fifth-largest pharmaceutical company in the US generics market as per IQVIA MAT September 2023. It had 390 approvals (including 24 tentative approvals) and filed 448 abbreviated new drug application (ANDAs), as on September 30, 2023. Healthy pace of filings and approvals in the US, also reflected in the strong ANDA pipeline, will strengthen the US business. The group also has established presence in rest-of-the-world markets of Brazil, Mexico, Sri Lanka, South Africa, France, Spain and other countries where it reported healthy revenue growth despite geopolitical challenges and adverse macro environment. The rest-of-the world segment formed 10% of the consolidated revenue in the first half of fiscal 2024.

 

• Strong financial risk profile: Strong financial risk profile is reflected in healthy capital structure and debt protection metrics. Adjusted gearing improved to less than 0.1 time as on September 30, 2023, while interest coverage ratio improved to over 100 times in the first half of fiscal 2024 due to minimal outstanding debt. The company repaid its entire outstanding 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. Outstanding gross debt was Rs 150 crore and healthy liquidity built-up has resulted in net cash position of Rs 1,639 crore as on September 30, 2023. The financial risk profile is expected to remain strong with net debt to Ebitda ratio sustaining at low levels over the medium term, after factoring in moderate capex and inorganic growth plans. Any sizeable debt-funded acquisition or investments could adversely impact debt metrics and liquidity and would remain a key monitorable.

 

Weaknesses

• Exposure to risks related to unfavourable regulatory changes: The Zydus group remains exposed to regulatory risks, both in the domestic and international markets, particularly the US. For instance, in October 2019, a warning letter was issued by the US FDA for the Moraiya plant, which impacted new product approvals. While the USFDA has cleared this warning letter in November 2022 and company has started getting new product approvals, any such 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 remains a monitorable. Furthermore, any price-control measures of the government in the branded segment in the domestic formulations segment may weaken growth.

 

• Exposure 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 present. Furthermore, 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 remained at around 196 days in fiscal 2023. However, ample liquidity and high financial flexibility should be sufficient to meet incremental working capital requirement.

Liquidity: Superior

Healthy cash and cash equivalents (including investments in mutual funds) of Rs 1,789crore as on September 30, 2023, and strong annual cash generation support liquidity. Besides, the company has been sanctioned fund-based bank limit of about Rs 3,400 crore, which remains moderately utilised at less than 20% for the 12 months through September 2023, cushioning liquidity. Annual cash accrual of over Rs 3,250 crore will be more than sufficient to meet annual capex of Rs 900-1,000 crore and fund expected moderate inorganic growth plans. The company does not have any outstanding long-term debt which supports liquidity.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that 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 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 greenhouse gas (GHG) emissions. Total GHG emissions have come down by 12% in fiscal 2023.
• The company has been recycling and co-processing its hazardous waste. Total waste generated by the company declined 8% in fiscal 2023 and recycling/co-processing of hazardous waste increased to 47% of the total waste generated from 44% in the previous year.
• The company 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 7% of the total workforce in fiscal 2023. The company is committed to increasing this to 12% by fiscal 2026.
• The governance structure is adequate, with half of the board comprising independent directors. The company also has in place 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 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 levels to fund large acquisitions, capex and sizeable stretch in working capital cycle resulting in net debt to Ebitda ratio rising above 0.5 time on steady-state basis.
• Any significant payout towards the ongoing anti-trust litigation or any other adverse regulatory developments impacting liquidity as well as debt protection metrics.

About the Company

Cadila Laboratories was founded 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 again 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 generic market in terms of prescriptions. Other segments include emerging markets formulations, consumer wellness, animal healthcare and bulk drugs. Zydus group has 15 formulation manufacturing units, 1 animal health unit, 6 bulk drug manufacturing units, 3 biologics units, 5 vaccine units and 4 consumer product facilities in India. Additionally, it has one formulation manufacturing unit each in Myanmar and Brazil. Apart from this, the company has 7 R&D centres in Gujarat and Maharashtra and 1 R&D centre in Italy.

 

As on September 30, 2023, 74.98% stake in Zydus Life was held by the promoters, 6.86% by insurance companies, 5.94% by mutual funds, and the balance was held by the public and others.

 

For the half-year ended September 30, 2023, the company reported profit after tax (PAT) of Rs 1,888 crore (Rs 1,041 crore in the corresponding period of the previous fiscal) on operating income of Rs 9,508 crore (Rs 7,970 crore in the corresponding period of the previous fiscal).

Key Financial Indicators

Particulars	Unit	2023	2022
Operating income	Rs crore	17,237	15,110
Adjusted PAT*	Rs crore	1,546	3,945**
Adjusted PAT margin*	%	9.0	26.1
Adjusted debt/adjusted networth*	Times	0.07	0.26
Interest coverage	Times	39.0	27.8

*Adjusted for goodwill and intangibles amortization

**includes income from discontinued operations

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	1500.00	NA	CRISIL AAA/Stable
NA	Cash credit^	NA	NA	NA	2103.10	NA	CRISIL AAA/Stable
NA	Bank guarantee*	NA	NA	NA	250.00	NA	CRISIL A1+
NA	Proposed term loan	NA	NA	NA	870.90	NA	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	200.00	Simple	CRISIL A1+
NA	Non-convertible debentures @	NA	NA	NA	75.00	Simple	CRISIL AAA/Stable
NA	Non-convertible debentures @	NA	NA	NA	50.00	Simple	CRISIL AAA/Stable

^Interchangeable with bank guarantee and letter of credit facility

*Interchangeable with letter of credit facility

@ Not placed

Annexure – List of entities consolidated

S. No	Name of entity	Extent of consolidation	Rationale of consolidation
1	Zydus Healthcare Ltd	100.00%	Subsidiary
2	German Remedies Pharmaceuticals Pvt Ltd	100.00%	Subsidiary
3	Zydus Wellness Ltd	57.59%	Subsidiary
4	Zydus Wellness Products Ltd	57.59%	Subsidiary
5	Liva Nutritions Ltd	57.59%	Subsidiary
6	Liva Investment Ltd	57.59%	Subsidiary
7	Zydus Animal Health and Investments Ltd	100.00%	Subsidiary
8	Dialforhealth Greencross Ltd	100.00%	Subsidiary
9	Dialforhealth Unity Ltd	55.00%	Subsidiary
10	Violio Healthcare Ltd	100.00%	Subsidiary
11	Zydus Pharmaceuticals Ltd	100.00%	Subsidiary
12	Biochem Pharmaceutical Pvt Ltd	100.00%	Subsidiary
13	Zydus Strategic Investments Ltd	100.00%	Subsidiary
14	Zydus VTEC Ltd	100.00%	Subsidiary
15	Zydus Lanka (Pvt) Ltd	100.00%	Subsidiary
16	Zydus International Pvt Ltd	100.00%	Subsidiary
17	Zydus Netherlands B.V.	100.00%	Subsidiary
18	Zydus France, SAS	100.00%	Subsidiary
19	Laboratorios Combix S.L.	100.00%	Subsidiary
20	Etna Biotech S.R.L.	100.00%	Subsidiary
21	Zydus Healthcare (USA) LLC	100.00%	Subsidiary
22	Zydus Pharmaceuticals (USA) Inc.	100.00%	Subsidiary
23	Nesher Pharmaceuticals (USA) LLC	100.00%	Subsidiary
24	ZyVet Animal Health Inc.	100.00%	Subsidiary
25	Sentynl Therapeutics, Inc	100.00%	Subsidiary
26	Zydus Noveltech Inc., USA	100.00%	Subsidiary
27	Hercon Pharmaceuticals, LLC	100.00%	Subsidiary
28	Viona Pharmaceuticals Inc.	100.00%	Subsidiary
29	Zydus Therapeutics Inc.	100.00%	Subsidiary
30	Zydus Pharmaceuticals UK Ltd	100.00%	Subsidiary
31	Zynext Ventures Pte Ltd	100.00%	Subsidiary
32	Zynext Ventures USA LLC	100.00%	Subsidiary
33	Zydus Worldwide DMCC	100.00%	Subsidiary
34	Zydus Wellness [BD] Pvt Ltd	57.59%	Subsidiary
35	Zydus Wellness International DMCC	57.59%	Subsidiary
36	Zydus Nikkho Farmaceutica Ltda.	100.00%	Subsidiary
37	Zydus Healthcare SA (Pty) Ltd.	100.00%	Subsidiary
38	Alidac Healthcare SA (Pty) Ltd (erstwhile Simayla Pharmaceuticals (Pty) Ltd)	100.00%	Subsidiary
39	Script Management Services (Pty) Ltd.	100.00%	Subsidiary
40	Zydus Healthcare Philippines Inc.	100.00%	Subsidiary
41	Alidac Healthcare (Myanmar) Ltd	100.00%	Subsidiary
42	Zydus Pharmaceuticals Mexico SA De CV	100.00%	Subsidiary
43	Zydus Pharmaceuticals Mexico Service Company SA De CV	100.00%	Subsidiary
44	M/s. Recon Pharmaceuticals and Investments	100.00%	Partnership
45	Zydus Takeda Healthcare Pvt Ltd	50.00%	JV (moderately consolidated)
46	Zydus Hospira Oncology Pvt Ltd	50.00%	JV (moderately consolidated)
47	Bayer Zydus Pharma Pvt Ltd	24.999998%	JV (moderately consolidated)