Rating Rationale
October 05, 2018 | Mumbai
Aarti Drugs Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.1246 Crore (Enhanced from Rs.1081 Crore)
Long Term Rating CRISIL A/Positive (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.50 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper of Aarti Drugs Limited (ADL) at 'CRISIL A/Positive/CRISIL A1'.

CRISIL had revised the outlook on the long-term bank facilities of ADL to 'Positive' from 'Stable' while reaffirming the ratings at 'CRISIL A/CRISIL A1' on August 20, 2018.

The ratings continue to reflect ADL's strong market position in the active pharmaceutical ingredients (APIs) business, sound operating efficiencies and an above-average financial risk profile. These strengths are partially offset by large working capital requirement and susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of ADL and its wholly owned subsidiary, Pinnacle Life Science Pvt Ltd (PLSPL).

Unsecured loans (outstanding at Rs 12.17 crore as on March 31, 2018) extended to ADL by the promoters and affiliate entities have been treated as neither debt nor equity. That is because these loans are expected to remain in the business for at least three years.

Key Rating Drivers & Detailed Description
Strengths
* Strong market position
ADL is one of the leading manufacturers of APIs in India, operating in over 12 therapeutic segments with expertise in the antibiotic and antidiarrheal segments.  Furthermore, it has been increasing its focus on the antifungal and antidiabetic segments by adding new product capacities or enhancing existing capacities. ADL has a diversified customer base, with around 37% revenue from exports to Latin America, Europe, Asia, Africa and USA. It has a robust and diversified clientele in the domestic market as well. The strong market position is expected to continue supporting the business.

* Sound operating efficiencies
ADL has healthy operating efficiencies, with continuously improving operating margin and return on capital employed ratio. Along with high economies of scale, operating efficiency is also supported by enhanced level of backward integrations for key products and research and development capabilities, which help develop new products and improve processes to optimise costs.

* Above-average financial risk profile
Networth was Rs 463 crore as on March 31, 2018, with TOL/TNW ratio just under 2 times. Interest coverage ratio and net cash accrual to total debt ratios were above 5 times and 0.22 time, respectively, in fiscal 2018. In fiscal 2019, ADL is slated to incur capex of Rs 68 crore, with 75% of the quantum to be funded by term debt. Competitive borrowing costs and healthy moratorium for incremental debt continue to support the financial risk profile.

Weaknesses
* Large working capital requirement
Gross current assets were around 215 days as on March 31, 2018, higher than the usual level of 170-180 days, mainly due to inventories of almost 97 days at the end of the fiscal.  While inventory level is typically high, necessitated by lead time on imports and a diversified product basket, the same is expected to correct to around 90 days going forward, and consequently, gross current assets are expected to decline to less than 200 days.

* Susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks
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 company 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). Since March 2015, US FDA has banned exports to the US from one of ADL's manufacturing facilities in Tarapur (Maharashtra); however, its impact is limited as exports to the US account for less than 1% of total sales.
Outlook: Positive

CRISIL believes ADL will register steady revenue growth over the medium term, while maintaining profitability and efficient working capital management, thereby strengthening financial risk profile. The ratings may be upgraded in case of improvement in ADL's capital structure and RoCE, while maintaining its working capital cycle. Conversely, the outlook may be revised to 'Stable' if larger-than-expected, debt-funded capex, lower than expected cash accruals from operations, or stretch in working capital cycle translates into the capital structure remaining at present levels.

About the Company

ADL, incorporated in 1984, manufactures APIs, formulations, advance intermediates, and specialty chemicals; APIs contribute almost 90% to the total revenue. ADL has 10 manufacturing facilities certified under good manufacturing practices in Maharashtra and Gujarat. The company generates around 37% of its revenue from exports and operates in over 90 countries. It is listed on the Bombay Stock Exchange and National Stock Exchange.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 1262.56 1288.08
Profit After Tax (PAT) Rs crore 82.31 81.80
PAT Margin % 6.62 6.84
Adjusted debt/adjusted networth Times 1.22 1.23
Interest coverage Times 5.27 4.84

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
Rating Assigned
with Outlook
NA Working Capital Facility NA NA NA 840 CRISIL A/Positive
NA Working Capital Facility NA NA NA 106 CRISIL A1
NA Cash Credit NA NA NA 30.00 CRISIL A/Positive
NA Term Loan NA NA Mar-2022 269.86 CRISIL A/Positive
NA Proposed Working Capital Facility NA NA NA 0.14 CRISIL A/Positive
NA Commercial Paper NA NA 7 to 365 Days 50.00 CRISIL A1
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A1  20-08-18  CRISIL A1  09-08-17  CRISIL A1  27-12-16  CRISIL A1  17-11-15  CRISIL A1  -- 
        19-03-18  CRISIL A1      15-07-16  CRISIL A1       
                08-07-16  CRISIL A1       
Fund-based Bank Facilities  LT/ST  1246.00  CRISIL A/Positive/ CRISIL A1  20-08-18  CRISIL A/Positive/ CRISIL A1  09-08-17  CRISIL A/Stable/ CRISIL A1  27-12-16  CRISIL A/Stable/ CRISIL A1  17-11-15  CRISIL A/Stable/ CRISIL A1  -- 
        19-03-18  CRISIL A/Stable/ CRISIL A1      15-07-16  CRISIL A/Stable/ CRISIL A1  17-08-15  CRISIL A/Stable/ CRISIL A1   
                08-07-16  CRISIL A/Stable/ CRISIL A1  14-08-15  CRISIL A/Stable/ CRISIL A1   
                    31-07-15  CRISIL A/Stable/ CRISIL A1   
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  31-07-15  CRISIL A1  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 30 CRISIL A/Positive Cash Credit 30 CRISIL A/Positive
Proposed Working Capital Facility .14 CRISIL A/Positive Term Loan 218.86 CRISIL A/Positive
Term Loan 269.86 CRISIL A/Positive Working Capital Facility 726.14 CRISIL A/Positive
Working Capital Facility 840 CRISIL A/Positive Working Capital Facility 106 CRISIL A1
Working Capital Facility 106 CRISIL A1 -- 0 --
Total 1246 -- Total 1081 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for the Pharmaceutical Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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