Rating Rationale
August 03, 2022 | Mumbai
Aarti Drugs Limited
 
Rating Action
Total Bank Loan Facilities RatedRs.1636 Crore
Long Term RatingCRISIL AA-/Stable
Short Term RatingCRISIL A1+
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities
This Rating Rationale is published solely to update the bank-wise facility details as provided by the rated entity; other sections are same as the previous Rating Rationale dated July 27, 2022.

Detailed Rationale

CRISIL Rating’s ratings on the bank facilities of Aarti Drugs Limited (ADL, part of Aarti group) continue to reflect Aarti group’s established market position in the active pharmaceutical ingredients (APIs) business, sound operating efficiencies and strong financial risk profile. These strengths are partially offset by working capital intensive nature of operations and susceptibility of operating margin to fluctuations in raw material prices, intense competition, and regulatory risks.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of ADL and its wholly owned subsidiary, Pinnacle Life Science Pvt Ltd (PLSPL; Rated 'CRISIL A/Stable/CRISIL A1'), herein after referred to as the Aarti group, as there are operational and financial linkages between these entities.

 

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 active pharmaceutical ingredients (APIs) business

Aarti Group is one of the leading manufacturers of APIs in India, operating in over 12 therapeutic segments with expertise in the antibiotic and antidiarrheal segments with increasing focus on the anti-protozol, antifungal and antidiabetic segments. Group is in process of adding new product capacities as well as enhancing existing capacities. ADL has a diversified customer base with presence in domestic as well as export markets. Group has reported revenue of around Rs 2489 crore in fiscal 2022 against Rs 2155 crore in fiscal 2020.

 

  • Sound operating efficiencies

Aarti group has healthy operating efficiencies supported by high economies of scale and enhanced level of backward and forward integrations for key products and research and development capabilities, which help develop new products and improve processes to optimize costs. While operating margin was impacted in fiscal 2022 on account of sharp raw material price movement, operating margin are expected to remain steady at around 16-17 percent levels over the medium term.

 

  • Strong financial risk profile

Total outside liabilities to adjusted networth of sub 0.3 time on a healthy networth base of Rs 1036 crore represents healthy capital structure. Further, debt protection metrics is robust indicated by interest coverage and net cash accrual to adjusted debt ratios at 16.4 times and 0.5 times, respectively, in fiscal 2022. Financial risk profile is expected to be maintained over the medium term despite debt funded capex supported by Aarti group management’s conservative policy towards debt and expected improvement in operating performance. 

 

Weaknesses:

  • Working capital intensive nature of operations

Operations are working capital intensive indicated by gross current assets in range of remain high at gross current asset day (GCA) of 180-200 days over past 3 years through March 31, 2022. Debtors have been in range of 90-110 days and inventory in range of 70-90 days during this period. As a result, majority of the accretions are utilised towards working capital and capital expenditure requirements of the group.

 

  • Susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks

Although group has ability to pass on increase in raw material prices to its customers, Group’s operating margin is susceptible to sharp changes in raw material prices as seen during fiscal 2022. Further, majority of raw material is imported from China which exposes group to geo-political risks. While group has found alternate procurement sources for some raw materials; meaningful diversification of raw material procurement from non-Chinese suppliers would be monitorable going ahead.

 

Further, the bulk drugs industry is highly competitive due to presence of numerous domestic as well as global players, which exerts pricing pressure on individual entities. This necessitates the group to remain cost competitive to maintain profitability. Indian players, including ADL, also face challenges from increase in inspections and regulatory actions by authorities such as the US Food and Drug Administration (FDA).

Liquidity: Strong

Aarti Group has strong liquidity driven by expected cash accruals of Rs 300 crore per annum over medium term and unencumbered cash and cash equivalents of Rs 22 crore as on March 31, 2022. Company’s fund-based bank limits were utilized at an average of 63% over last 12 months ended March 2022. The company has long term repayment obligation of around Rs 60 crore and capex of around Rs 200-250 crore per annum over medium term. The liquidity is further supported by unsecured loans extended by the promoters. This funding support is expected to continue over the medium term. CRISIL Ratings believes group's net cash accruals, unutilized bank limits and cash and cash equivalents will be sufficient to fund its incremental working capital, debt repayment and capex requirements over the medium term.

Outlook: Stable

CRISIL Ratings believes the Aarti groups’ business risk profile will continue to improve over the medium term backed by good growth prospects for its products. This will help in gradual improvement in utilization of capacities to be added and in maintaining operation margin

Rating Sensitivity factors

Upward factors

  • Sharp and sustained revenue growth with operating margin remaining above 18% backed by successful ramp-up of operations from planned capacity expansion and product diversification  leading to higher net cash accruals
  • Sharp improvement in working capital cycle
  • Sustenance of financial risk profile

 

Downward factors

  • Decline in revenue or operating margin continuing to remain below 15%
  • Cost or time overrun in planned capacity expansion
  • Increase in working capital requirement, larger-than-expected, debt-funded capex or acquisition, or more-than-expected dividend pay-out, weakening the financial risk profile, particularly liquidity

About the Group

ADL, incorporated in 1984, manufactures APIs, formulations, advance intermediates, and specialty chemicals; APIs contribute almost 80% to the total revenue. ADL has 11 manufacturing facilities certified under good manufacturing practices in Maharashtra and Gujarat. The company operates in over 90 countries. It is listed on the Bombay Stock Exchange and National Stock Exchange.

 

PLSPL, incorporated in 2003, manufactures and packages pharmaceutical formulations. ADL acquired PLSPL in September 2014, making it a wholly own subsidiary. PLSPL recommenced commercial operations in December 2014. Most of its requirement of active pharmaceutical ingredients (APIs) is met by ADL.

Key Financial Indicators (Consolidated)

Particulars

Unit

2022

2021

Revenue

Rs. Cr.

2489

2155

Profit After Tax

Rs. Cr.

205

280

PAT Margin

%

8.24

13.01

Adjusted Debt/Adjusted Net worth

Times

0.52

0.34

Interest coverage

Times

16.42

19.24

 

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)

ISIN

Name of instrument

Date of

Allotment

Coupon

Rate (%)

Maturity

date

Issue Size

(Rs. Cr)

Complexity

Levels

Rating Assigned

with Outlook

NA

Cash Credit

NA

NA

NA

66

NA

CRISIL AA-/Stable

NA

Composite Working Capital Limit

NA

NA

NA

1176

NA

CRISIL A1+

NA

External Commercial Borrowings

NA

NA

Mar-27

11

NA

CRISIL AA-/Stable

NA

Proposed Working Capital Facility

NA

NA

NA

48

NA

CRISIL A1+

NA

Proposed Term Loan

NA

NA

NA

65.03

NA

CRISIL AA-/Stable

NA

Term Loan

NA

NA

Mar-26

269.97

NA

CRISIL AA-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Aarti Drugs Limited

Full

Similar line of business with operational synergies and wholly owned subsidiary

Pinnacle Life Science Private Limited

 

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 1636.0 CRISIL A1+ / CRISIL AA-/Stable 27-07-22 CRISIL A1+ / CRISIL AA-/Stable 30-04-21 CRISIL A1+ / CRISIL AA-/Stable 26-10-20 CRISIL A+/Positive / CRISIL A1 23-07-19 CRISIL A+/Stable / CRISIL A1 CRISIL A/Positive / CRISIL A1
      --   -- 14-04-21 CRISIL A1+ / CRISIL AA-/Stable 15-10-20 CRISIL A+/Positive / CRISIL A1   -- CRISIL A/Positive
Commercial Paper ST   --   --   --   --   -- Withdrawn
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 65 HDFC Bank Limited CRISIL AA-/Stable
Cash Credit 1 IDBI Bank Limited CRISIL AA-/Stable
Composite Working Capital Limit 50 RBL Bank Limited CRISIL A1+
Composite Working Capital Limit 44 IDBI Bank Limited CRISIL A1+
Composite Working Capital Limit 32 SVC Co-Operative Bank Limited CRISIL A1+
Composite Working Capital Limit 150 HDFC Bank Limited CRISIL A1+
Composite Working Capital Limit 50 Emirates NBD Bank PJSC CRISIL A1+
Composite Working Capital Limit 40 The Federal Bank Limited CRISIL A1+
Composite Working Capital Limit 180 Kotak Mahindra Bank Limited CRISIL A1+
Composite Working Capital Limit 80 State Bank of India CRISIL A1+
Composite Working Capital Limit 60 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+
Composite Working Capital Limit 75 Union Bank of India CRISIL A1+
Composite Working Capital Limit 200 Axis Bank Limited CRISIL A1+
Composite Working Capital Limit 125 Standard Chartered Bank Limited CRISIL A1+
Composite Working Capital Limit 90 DBS Bank Limited CRISIL A1+
External Commercial Borrowings 11 State Bank of India CRISIL AA-/Stable
Proposed Term Loan 65.03 Not Applicable CRISIL AA-/Stable
Proposed Working Capital Facility 48 Not Applicable CRISIL A1+
Term Loan 48.3 SVC Co-Operative Bank Limited CRISIL AA-/Stable
Term Loan 181.5 Kotak Mahindra Bank Limited CRISIL AA-/Stable
Term Loan 40.17 HDFC Bank Limited CRISIL AA-/Stable

This Annexure has been updated on 03-Aug-22 in line with the lender-wise facility details as on 08-Sep-21 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for the Pharmaceutical Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation
Understanding CRISILs Ratings and Rating Scales

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