Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Aculife Healthcare Private Limited (Aculife) ‘Stable’ from ‘Positive’ and reaffirmed the rating at ‘CRISIL A’. The short term rating has been reaffirmed at ‘CRISIL A1’.

 

The revision in outlook reflects slower-than-expected ramp-up in sales, especially exports, due to high freight costs and delay in completion of capital expenditure (capex). The sharp rise in freight rates and limited flexibility to pass it on to customers continues to impact export sales, while the momentum continues in domestic sales. This has led to considerably lower export revenue than expected, moderating operating profitability. This trend is expected to continue this fiscal. Furthermore, delay in completion of capex and new product registrations and launches has delayed the launch of high-margin products to fiscal 2024. However, healthy traction in the domestic markets along with low reliance on external debt is expected to keep the credit profile stable over the medium term.

 

Revenue in fiscal 2022 grew 5% to Rs 495 crore, driven primarily by strong growth in domestic sales, which compensated for lower-than-expected exports. The resumption of non-Covid-related medical therapies and surgeries led to improvement in domestic demand. Going forward, Aculife is expected to register moderate revenue growth this fiscal as export markets remain subdued amidst high freight costs and inflationary pressures. However, the company is expected to boost its product portfolio with several new additions by the end of next fiscal, which should lead to a strong growth trajectory over the medium term.

 

While operating profitability moderated to 19.6% in fiscal 2022 due to higher freight and input costs, inventory write-offs and lower exports is expected to lead to moderate operating profitability in fiscal 2023 as well. Additions to the product portfolio as well as recovery in exports could lead to gradual improvement in operating profitability over the medium term.

 

The financial risk profile has improved with debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 1.22 times in fiscal 2022, against 2.56 times in fiscal 2020, as the company has completely repaid its long-term debt. The gearing has also improved to 0.42 time as on March 31, 2022, from 1.48 times as on March 31, 2020. The interest coverage and net cash accrual to total debt ratios are estimated to have been healthy at 7.5 times and 0.63 time, respectively, for fiscal 2022. Internal accrual is expected to be sufficient to fund the company’s Rs 200 crore capex plan for fiscals 2022 and 2023, part of which was completed last fiscal. This capex will lead to upgradation of the existing facilities and also  manufacture new products, such as large volume bags, gaseous anaesthesia injections, respules and opthalmological products (primarily for emerging and developed market (like European Union, Canada, ANZ). The group could evaluate inorganic growth plans in the pharma vertical, for which funding and its impact on Aculife’s capital structure would remain a key monitorable.

 

The ratings continue to reflect Aculife’s strong market position in the parenteral business and its healthy operating profitability along with strong backing from Nirma group promoters. These strengths are partially offset by intense competition in the companies’ major business segment, moderate but improving financial risk profile, and large working capital requirement.

Analytical Approach

• CRISIL Ratings has consolidated Aculife and its subsidiaries, considering the commonality of operations and management.
• CRISIL Ratings has also applied its group notch-up framework to factor in the support available to Aculife Healthcare from the Nirma group.
• CRISIL Ratings has treated preference shares as 75% equity and 25% debt. Preference share capital, subscribed by group companies, have been rolled over for the next seven years and are non-cumulative in nature.

 

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:

Strong market position in the parenteral business: Aculife is one of the leading players in the parenteral business, supported by strong brands (Flexivent and One Use) and presence in the domestic and international markets. Increasing contribution from high value-added products, primarily the parenteral and the speciality divisions, led by the introduction of new products in the market should lead to healthy growth in sales over the long term. Furthermore, entry into new geographies and introduction of new products should lead to improvement in the overall business profile.

 

Healthy operating profitability: Apart from increase in share of high-margin products, other factors such as cost optimisation and suspension of the loss-making medical devices division, have helped improve profitability. The company had undertaken capex to semi-automate the packaging process and further reduce labour cost.  While operating profitability moderated to 19.6% in fiscal 2022, due to higher freight and input costs, inventory write-offs and lower exports are expected to lead to moderate operating profitability in fiscal 2023 as well. Additions to the product portfolio as well as recovery in exports could lead to gradual improvement in operating profitability over the medium term.

 

Support from the Nirma group: Key management personnel drawn from the Nirma group, over time, have provided oversight and have been involved in strategy planning, with the healthcare business being critical for the Nirma group. Besides, the promoters have supported Aculife by subscribing to preference shares through Nirma Ltd at flexible terms. Given Aculife’s increasing scale of operations and good prospects for the healthcare sector, CRISIL Ratings expects support from the Nirma group to continue.

 

Weakness:

Intense competition in parenteral division: About 53% of the revenue is derived from high-volume and low-value parenteral division in a highly price competitive fragmented markets (domestic and partially tenders in the global market); wherein orders are based on tenders and the company has low bargaining power. However, Aculife has been focusing on higher value specialty products in which it has higher bargaining power and can create brand equity. This is expected to improve the operating margin and provide stability.

 

Working capital-intensive operations: The company has large inventory of 3-4 months and receivables cycle of 1-2 months. Post the change in management, the gross current assets have improved to 156 days estimated in fiscal 2022, against 170-180 days earlier.

Liquidity: Adequate

Liquidity is aided by low bank limit utilisation, moderate working capital requirement and adequate cash accrual. Annual cash accrual of over Rs. 88 crore should comfortably cover the capex. Liquidity is further augmented by bank limits of Rs 145 crore which was moderately utilised at 49% on average during the 12 months through August 2022. Furthermore, CRISIL Ratings believes Aculife, being a part of the Nirma group, would receive support as and when necessary, adding to its financial flexibility. The group could evaluate inorganic growth plans in the pharma vertical, whose funding and impact on Aculife’s capital structure would remain a key monitorable.

Outlook: Stable

CRISIL Ratings believes Aculife will maintain its established position in the parenteral segment. The business risk profile will continue to benefit from sustained increase in revenue and healthy operating profitability over the medium term, backed by its established market position. The company is likely to maintain its strong financial risk profile, supported by a comfortable capital structure and healthy cash accrual and debt protection metrics.

Rating Sensitivity Factors

Upward factors

• Sustained double-digit revenue growth with operating margin of 20-22%, leading to healthy cash generation
• Diversification in the revenue mix across geographies and products
• Sustenance of healthy financial risk profile and debt protection metrics

 

Downward factors

• Sluggish revenue growth, with operating margin dipping below 13-15%, also impacting cash generation
• Any large, debt-funded acquisition or capex or stretched working capital cycle, leading to deterioration in debt protection metrics
• Delay in support from the Nirma group, in the event of exigencies

About the Company

Aculife was incorporated in 2014, by demerging the healthcare division (Nirlife) of Nirma Ltd (‘CRISIL AA/Stable/CRISIL A1+’). Nirlife was founded by acquiring a parenteral manufacturing company with a track record of two decades.

 

Aculife offers over 600 products in multiple markets and therapeutic areas, including anaesthesia, critical care, anti-infectives, renal care, infusion therapy and parenteral nutrition. It offers injectables in various forms such as glass and plastic bottles, vials, ampoules and pre-filled syringes. The products are marketed under Flexivent and One Use brands. The customer base primarily includes Nursing homes, private & corporate hospitals and Government Institutions. Aculife has an established market position and a large product portfolio in India and markets such as Latin America, the Middle East, Commonwealth of Independent States (CIS), Africa and Asia.

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	Term loan	NA	NA	NA	20	NA	CRISIL A/Stable
NA	Cash credit	NA	NA	NA	100	NA	CRISIL A/Stable
NA	Cash credit@	NA	NA	NA	45	NA	CRISIL A/Stable
NA	Letter of credit*	NA	NA	NA	50	NA	CRISIL A1
NA	Proposed long-term bank loan facility	NA	NA	NA	30	NA	CRISIL A/Stable
NA	Proposed term loan	NA	NA	NA	250	NA	CRISIL A/Stable

@Fully interchangeable with non-fund-based limits

*Fully interchangeable with bank guarantee