Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities, non-convertible debentures (NCDs) and commercial paper programme of Alembic Pharmaceuticals Limited (Alembic). The rating on the NCDs of Rs 300 crore is withdrawn as per client request and in line with CRISIL Ratings policy for withdrawal of ratings.

 

Revenue declined 6% on-year in the first-half of fiscal 2022 due to de-growth in the US portfolio with intense price erosion and increasing competition in the sartan portfolio. Healthy pick-up in domestic sales on a lower base of previous fiscal supported revenue in the first-half of current fiscal. Operating income grew 17% on-year in fiscal 2021, supported by healthy growth in rest of the world market and active pharmaceutical ingredients (APIs), even as domestic business growth was subdued by the effect of Covid-19 on the acute segment sales. Operating margin moderated to 18.8% in the first-half of 2022 from 28.9% in fiscal 2021 due to lower realisations for few of its key products.

 

Sales are likely to remain flat in fiscal 2022; steady demand for existing products and new product launches in the international and domestic segments would support growth momentum over the medium term. Margin is expected to remain healthy at about 20% over the medium term, given continued research and development (R&D) expenses (12-13% of sales) and focus on building abbreviated new drug application (ANDA) pipeline, particularly for specialised generics.

 

While working capital requirement reduced as on March 31, 2021, due to healthy collections, gross current assets are expected to remain at 160-180 days over the medium term (157 days as on March 31, 2021) give the focus on maintaining larger inventory to avoid any supply-side disruption. The company incurred sizeable debt-funded capital expenditure (capex) over the past few fiscals primarily towards specialised generics. However, capex is expected to be lower at Rs 300-350 crore annually over the medium term. Financial risk profile remains healthy with gearing of 0.11 time as on March 31, 2021 (0.60 time as on March 31, 2020), which is expected to remain about 0.25 time over the medium term.

 

The ratings continue to reflect the strong position of Alembic in the domestic formulations market, growing presence in the international generics segment, and healthy financial risk profile. These strengths are partially offset by modest profitability due to sizeable R&D expenditure, high share of the acute therapeutic segment in domestic formulations and exposure to intensifying pricing pressure and regulatory risks.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has fully consolidated the business and financial risk profiles of Alembic and its three subsidiaries and seven stepdown subsidiaries, which are strategically important to, and have a significant degree of operational integration with, Alembic. CRISIL Ratings had applied a moderate consolidation approach for four associate companies and one joint venture for which the share of profit and any incremental investment required are factored in.

 

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 position in the domestic formulations market:

The company is among the top 25 players in the domestic formulations market. Revenue was Rs 1,497 crore in fiscal 2021 (lower growth of 5% on-year due to the adverse impact of the pandemic on the acute segment sales, which account for ~55% of the overall revenue). Pick-up in domestic revenue on a lower base of the previous fiscal supported sharp growth of 37% in the first-half of 2022. The company has a portfolio of about 200 formulation brands, of which two are among the top 300 domestic formulations brands in India. 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.

 

• Considerable presence in the regulated generics market:

On account of greater focus on the US, Alembic has gradually stepped up its ANDA filings in the last few fiscals: 29 in 2021 from eight in 2016. R&D expenditure should remain high, forming about 12-13% of the net sales. Revenue from the international market (including bulk drugs) was 72% of the total revenue in fiscal 2021 (69% in 2020). Alembic registered sharp growth in US sales over the past few fiscals by capitalising on the supply opportunities arising due to shortage of the sartan group of formulations in the US market. However, in the first-half of fiscal 2022, US sales de-grew 39% due to significant price erosion and intense competition in the sartan portfolio. New product launches and long-term relationships with large clients would support revenue in the regulated market over the medium term. As on September 30, 2021, Alembic had filed for 214 ANDAs, of which 150 were approved.

 

• Healthy financial risk profile

Financial risk profile is healthy, as reflected in healthy gearing and networth of 0.11 time and Rs 4,744 crore, respectively, as on March 31, 2021, against 0.60 time and Rs 2,891 crore, respectively, as on March 31, 2020. This was mainly due to equity infusion of Rs 750 crore through QIP (qualified institutional placement) in fiscal 2021 and subsequent debt reduction. The company incurred sizeable debt-funded capex over the past few fiscals towards specialised generics. However, capex is expected to be lower at Rs 300-350 crore annually over the medium term. Gearing is expected to remain healthy within 0.25 time. Any larger-than-expected capex or debt-funded acquisition remains a key rating sensitivity factor.

 

Weaknesses:

• Profitability constrained by high R&D expenditure

Alembic had stepped-up R&D spends, particularly in the past 4-5 fiscals, to capitalise on differentiated generics opportunities in the US. With opportunity in sartan portfolio and cost savings due to the extended lockdowns, operating profitability improved sharply to 28.9% in fiscal 2021 from 22.2% in 2019. However, increased competition, severe price erosion in the US market, and continued high R&D expenditure led to a fall in profitability to 18.8% in the first-half of 2022. New product launches in differentiated generics will be critical for maintaining profitability.

 

• High share of acute therapeutic segment in the domestic formulations market

Therapeutic coverage in the domestic formulations market is dominated by the acute therapy and anti-infective segments. The portfolio remains significant in the acute segment (~55% of the domestic formulation sales in fiscal 2021), which is slow-growing and hence exposes Alembic to pricing pressure. With a quarter of the domestic revenue under DPCO (drug price control order), turnover and profitability remain susceptible to regulatory changes.

 

• Exposure to intensifying pricing pressure and regulatory risks

The company is exposed to regulatory changes in the Indian and global markets, as reflected in increasing scrutiny and inspections by authorities, including the US Food and Drug Administration (USFDA), European Medicines Agency and TGA Australia. When the company’s general injectable and ophthalmic facility in Karkhadi, Gujarat, was audited by the USFDA in February 2021, Alembic received few observations under form 483. The company has successfully addressed these and establishment inspection report (EIR) was issued. The facility was re-audited by USFDA in November 2021 and company is in the process of addressing the observations received. In the domestic market, the regulatory impact of DPCO and ban on some fixed-dose combinations adversely affected revenue and profit in the past, and may continue to do so over the medium term.

Liquidity: Strong

Liquid surplus was Rs 285 crore as on March 31, 2021, and net cash accrual was healthy at Rs 1,314 crore in fiscal 2021. Comfortable gearing and networth provide strong financial flexibility. Bank limit utilisation averaged less than 20% over the 12 months through September 2021. Cash accrual, expected at over Rs 650 crore per fiscal, should sufficiently cover debt obligation in fiscals 2022 and 2023 and fund capex.

Outlook: Stable

Alembic will sustain its healthy financial risk profile over the medium term, while new product launches and scale-up in the domestic segment would strengthen business risk profile.

Rating Sensitivity factors

Upward factors

• Sustained healthy revenue growth of 20%, with sustained operating profitability above 25%
• Sustained healthy capital structure with prudent working capital management

 

Downward factors

• Lower-than-expected revenue growth and sharp reduction in operating profitability below 18-20% on a sustained basis
• Larger-than-expected working capital requirement or capex and acquisitions leading to gearing and ratio of gross debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) remaining above 1.3 times and 1.5 times, respectively

About the Company

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

 

Alembic is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2021, the promoters and group entities held 69.48% stake, with foreign portfolio investors and the general public holding the remaining.

Key Financial Indicators

As on/For the period ended March 31		2021	2020
Revenue	Rs crore	5394	4607
Adjusted profit after tax (PAT)	Rs crore	1130	800
Adjusted PAT margin	%	21.0	17.4
Adjusted debt/adjusted networth	Times	0.11	0.60
Interest coverage	Times	100.33	47.03

 

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 & Working Capital Demand Loan**	NA	NA	NA	600.00	NA	CRISIL AA+/Stable
NA	Commercial Paper	NA	NA	7-365 days	750.00	Simple	CRISIL A1+
INE901L08013	Non Convertible Debentures	14-Dec-18	9.00	26-Nov-21	150.00	Simple	CRISIL AA+/Stable
INE901L08021	Non Convertible Debentures	14-Dec-18	9.00	25-Apr-22	200.00	Simple	CRISIL AA+/Stable
INE901L08039	Non Convertible Debentures	19-Mar-19	8.37	18-Mar-22	150.00	Simple	CRISIL AA+/Stable

**100% interchangeability between funded and non-funded

 

Annexure – Details of instrument(s) Withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level
NA	Non Convertible Debentures @	NA	NA	NA	300.00	Simple

@Not yet placed

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Alembic Global Holding SA	100%	Subsidiary
Aleor Dermaceuticals Ltd	60%	Subsidiary
Alembic Pharmaceutical Inc	100%	Subsidiary
Alembic Pharmaceuticals Australia Pty Ltd	100%	Stepdown subsidiary
Alembic Pharmaceuticals Europe Ltd	100%	Stepdown subsidiary
Alnova Pharmaceuticals SA	100%	Stepdown subsidiary
Alembic Pharmaceuticals Canada Ltd	100%	Stepdown subsidiary
Genius LLC	100%	Stepdown subsidiary
Alembic Labs LLC (Formerly Known as Orit Laboratories LLC)	100%	Stepdown subsidiary
Okner Realty LLC	100%	Stepdown subsidiary
SPH Sine Alembic (Shanghai) Pharmaceutical Technology Co Ltd	44%	Joint venture
Incozen Therapeutics Pvt Ltd	50%	Associate
Rhizen Pharmaceuticals AG (RPAG)	50%	Associate
Rhizen Pharmaceuticals Inc	100%	Subsidiary of RPAG
Dahlia Therapeutics SA	100%	Subsidiary of RPAG