Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Alembic Pharmaceuticals Limited (Alembic Pharma).

 

The ratings continue to reflect the strong position of Alembic Pharma in the domestic formulations market, its growing presence in the international generics segment and healthy financial risk profile. These strengths are partially offset by average profitability due to sizeable research and development (R&D) expenditure, high share of the acute therapeutic segment in domestic formulations and exposure to intense pricing pressure and regulatory risk in the pharma industry.

 

Consolidated revenue grew by 9% year-on-year (y-o-y) in the first nine months of fiscal 2023, supported by double-digit growth in active pharmaceutical ingredients (API) sales and growth in formulations sales in US on a lower base of the previous year. While revenue growth is projected to be modest in fiscal 2023, it is likely to grow by 8-10% over the medium term, aided by steady demand for existing products and new product launches in the domestic and international segments. Reported operating margin has moderated sharply to 11.7% in the first nine months of fiscal 2023 (from 17.3% in fiscal 2022) amidst high raw material and freight cost and price erosion in the US market. Excluding the impact of accelerated amortisation of intangible assets of Aleor Dermaceuticals Ltd (Aleor) on it becoming the wholly-owned subsidiary of Alembic Pharma, adjusted operating margin was ~14.2% in first nine months of fiscal 2023. With increased operating expenses and diseconomies of scale due to limited product approvals from the new manufacturing facilities, the operating margin is expected to remain low at 15-16% in fiscal 2024, partly aided by rationalisation of R&D expenses. With gradual ramp up in sales, the margin should improve to 17-19% over the medium term.

 

CRISIL Ratings notes that on March 2, 2023, Alembic Pharma decided to write-off an aggregate impairment amount of Rs 1,150 crore (including provision for write-off in future years). This write-off is with regard to pre-operative expenses recognised as part of the outstanding capital work-in-progress (CWIP) for three of its new manufacturing facilities, as the company assessment indicated that the carrying value of CWIP is higher than the recoverable value. The use of the general reserves for this impairment will result in a sharp decline in tangible networth of the company. Nonetheless, with low debt of Rs 686 crore as on December 31, 2022, gearing will remain comfortable below 0.2 time going forward.

 

Working capital intensity remains moderately high. Gross current assets (GCAs) are likely to range from 180 to 200 days over the medium term (193 days as on March 31, 2022), given the focus on maintaining larger inventory to capitalise on any market opportunity and avoid any supply-side disruption. The company has incurred sizeable, debt-funded capital expenditure (capex) over the past few fiscals towards specialised generics. It is further likely to incur capex of Rs 250-300 crore per fiscal over the medium term. Financial risk profile remains healthy, with only short-term debt outstanding and healthy cash accrual, translating into comfortable debt protection metrics.

Analytical Approach

CRISIL Ratings has fully consolidated the business and financial risk profiles of Alembic Pharma and its three subsidiaries and seven step-down subsidiaries. These entities are strategically important to, and have a significant degree of operational integration with, Alembic Pharma. CRISIL Ratings applied a moderate consolidation approach for four associate companies and two joint ventures (JVs) and has factored in the share of profit and requirement of any incremental investment.

 

Please refer to the Annexure - List of entities consolidated, which shows the entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

Strong position in the domestic formulations market

The company is among the top 25 players in the domestic formulations market. Revenue stood at Rs 1,573 crore for the first nine months of fiscal 2023, indicating 6% growth (y-o-y) over a high base of the previous year, when revenue grew by 29% (y-o-y), driven by pandemic-related sales. The company has a portfolio of about 200 formulation brands, of which three are among the top 300 domestic formulations brands in India. It has a share of 1.5% in the domestic market. Growth in the branded formulations segment will be backed by increased contribution from the chronic therapeutic segment and regular product launches, leading to volume growth.

 

Diversified presence in the international market

The international market (including bulk drugs) accounted for 63% of total revenue in the first nine months of fiscal 2023 (64% in fiscal 2022). US is a key market and formed 29% of total revenue over the same period. Apart from the US, Alembic Pharma has sizeable presence in Europe, Canada and Australia. With greater focus on the US, the company has gradually stepped up its abbreviated new drug application (ANDA) filings over the past few fiscals: 23 in fiscal 2022 from 8 in fiscal 2016. US sales grew by 10% y-o-y in the first nine months of fiscal 2023, on a lower base, supported by new product launches and favourable movement in foreign exchange rates against a degrowth of 23% y-o-y in fiscal 2022. New product launches, market share gains and long-term relationships with large clients would support revenue in the regulated market over the medium term. As on December 31, 2022, Alembic Pharma had filed for 246 ANDAs, of which 178 were approved.

 

Healthy financial risk profile

Financial risk profile is healthy, as reflected in tangible networth of over Rs 5,000 crore and low gearing of 0.12 time on March 31, 2022. While impairment recognition of Rs 1,150 crore will lead to a decline in networth, gearing should remain below 0.2 time as on March 31, 2023, given the low outstanding debt. Interest coverage ratio was comfortable at 13.9 times in first nine months of fiscal 2023. Over the past few fiscals, the company has incurred sizeable, debt-funded capex towards specialised generics. Capex is expected at Rs 250-300 crore annually over the medium term, to be funded by cash accrual. Thus, debt protection metrics should continue to be comfortable. However, any major capex or debt-funded acquisition remains a key rating sensitivity factor.

 

Weaknesses

Profitability constrained by high R&D expenditure, price erosion in US markets

Alembic Pharma has ramped up its R&D spends, particularly in the past 4-5 fiscals, to capitalise on differentiated generics opportunities in the US. R&D expenditure was high (at 12-14% of sales) in the past to build the ANDA pipeline. With sharp increase in raw material and freight cost and severe price erosion in the US, the adjusted operating margin (adjusted for the impact of accelerated amortisation of intangibles of Aleor) moderated to 14.2% in first nine months of fiscal 2023, from 19.5% in fiscal 2022. Besides, high share of acute therapies and intense competition in the domestic market have also impacted profitability adversely.

 

With increased operating expenses towards the new manufacturing facilities, operating margin is likely to be in the range of 15-16% in fiscal 2024, supported by rationalisation of R&D expenses. However, roll out of new product launches in differentiated generics will be critical for maintaining and enhancing operating profitability.

 

Exposure to intensifying pricing pressure and regulatory risk

The company remains exposed to risk posed by regulatory changes in India and the overseas markets, as reflected in increasing scrutiny and inspections by authorities, including the US Food and Drug Administration (USFDA), European Medicines Agency and TGA Australia. The oncology injectable facility at Panelav (Gujarat) underwent an audit in October 2022 and the oral solids facility at Jarod was audited in December 2022. The company received few observations under Form 483 for both these facilities and is now in the process of addressing them. In the domestic market, the regulatory impact of Drug Pricing Control Order and ban on some fixed-dose combinations adversely affected revenue and profit in the past and will be monitorable.

Liquidity: Strong

The company had a liquid surplus of Rs 146 crore as on December 31, 2022. Expected cash accrual of over Rs 600 crore in fiscal 2024, should sufficiently cover the capex requirement. The company only has short-term debt outstanding. Bank limit utilisation averaged less than 35% over the 12 months through January 2023. Comfortable debt protection metrics, enhances the fund-raising ability. The company has also raised equity through a qualified institutional placement in the recent past.

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes the ESG profile of Alembic Pharma supports its strong credit risk profile.

 

The pharmaceutical sector can have a significant impact on the environment owing to greenhouse gas emissions, water use and waste generation. The sector’s social impact is characterised by impact on the health and wellbeing of consumers due to its products and onon employees and local community on account of its operations.

 

Key ESG highlights

• The company has undertaken focussed efforts towards energy conservation and achieved an overall 12% reduction in the total energy consumption in fiscal 2022. It also achieved a 5% reduction in CO2 emission during the year.
• The company has deployed water management practices and processes all liquid waste. Also, the company recharges more water into the underground water table than what it consumes. It achieved an 18% increase in the rainwater harvested in fiscal 2022.
• It has implemented human rights policy and prevention of sexual harassment policy. Gender diversity in Alembic Pharma is marginally lower than industry peers, with women employees comprising 5-6% of the workforce over past few years.
• Alembic Pharma has adequate governance structure, with majority of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Alembic Pharma’s continued commitment 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 business risk profile is likely to benefit from the diversified segmental and geographical presence of the company in the pharmaceutical space. However, the operating margin will remain average amidst intense competition, price erosion in US, inflation driven cost and R&D spends. Healthy cash generation and prudent capital spending will help sustain healthy financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors

• Double-digit revenue growth supported by new product launches and operating profitability improving above 20-22% on a sustained basis, resulting in better-than-expected cash generation
• Prudent capital spending and working capital management along with healthy cash generation will ensure maintenance of healthy financial risk profile and comfortable debt protection metrics
• Gradual build-up of liquid surpluses

 

Downward factors

• Lower-than-expected revenue growth and operating profitability remaining below 14-16% on a sustained basis, also impacting cash generation
• Larger-than-expected working capital requirement or capex and acquisitions, leading to moderation in debt protection metrics

About the Company

The pharmaceuticals business of Alembic Ltd (AL), comprising domestic formulations, international generics and APIs, was transferred to Alembic Pharma, following the latter’s demerger from AL effective April 1, 2010. Vadodara-based Alembic Pharma manufactures a range of formulations and bulk drugs for the domestic and international markets. It has nine manufacturing facilities for formulations and APIs and three R&D facilities.

 

Alembic Pharma is listed on the Bombay Stock Exchange and the National Stock Exchange. As on December 31, 2022, the promoters and group entities held 69.61% stake, foreign portfolio investors held 4.99%, individuals held 9.21% and the balance was held by others.

 

For the first nine months of fiscal 2023, the company reported a profit after tax (PAT) of Rs 189 crore (PAT of Rs 490 crore in the corresponding period of fiscal 2022) on revenue of Rs 4,246 crore (Rs 3,890 crore).

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  levels	Rating assigned with outlook
NA	Cash credit and working capital demand loan**	NA	NA	NA	600	NA	CRISIL AA+/Stable
NA	Commercial Paper	NA	NA	7-365 days	750	Simple	CRISIL A1+

**100% interchangeability between funded and non-funded