Rating Rationale
December 06, 2018 | Mumbai
Alembic Pharmaceuticals Limited
'CRISIL AA+/Stable' assigned to NCD
Rating Action
Total Bank Loan Facilities Rated Rs.850 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Rs.200 Crore Non Convertible Debentures CRISIL AA+/Stable (Assigned)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned the rating of 'CRISIL AA+/Stable' to the Non-Convertible Debentures of Alembic Pharmaceuticals Limited (Alembic), while reaffirming the ratings of existing debt instruments and bank facilities at 'CRISIL AA+/Stable/CRISIL A1+'.
The ratings continue to reflect the company's strong position in the domestic formulations market, its growing presence in the international generics segment, and robust financial risk profile. These strengths are partially offset by moderate profitability due to sizeable research and development (R&D) expenditure, high share of acute therapeutic segment in domestic formulations, and exposure to intensifying pricing pressure and regulatory risks.
Revenue grew 38% year-over-year (y-o-y) in the first half of fiscal 2019, led by strong growth in international formulations, where shortage in valsartan gave rise to a one-off opportunity. Domestic formulations and international formulations rose 15% and 74% y-o-y, respectively. The operating margin improved to 22.8%, largely on account of the one-off opportunity. Going forward, revenue is expected to grow 11-12% in the medium term, boosted by recovery in the domestic market and new product launches in the international segment, which will partially offset the pricing pressure in the US market. Operating margin is likely to remain at 19-20%, given the elevated R&D requirement (about 14% of sales) with the focus on building abbreviated new drug applications (ANDAs), particularly for specialised generics.
Backed by moderate capital expenditure (capex) and comfortable networth, capital structure is expected to remain healthy, with gearing expected at 0.5 time over the medium term.

Analytical Approach

For arriving at its ratings, CRISIL has fully consolidated the business and financial risk profiles of Alembic, its three subsidiaries and six step-down subsidiaries, which are strategically important to, and have a significant degree of operational integration with Alembic. The subsidiaries are - Alembic Global Holding SA (Switzerland), AG Research Pvt Ltd (Hyderabad), and Aleor Dermaceuticals Ltd; its step-down subsidiaries are Alembic Pharmaceuticals Australia Pty Ltd, Alembic Pharmaceuticals Inc, Alembic Pharmaceuticals Europe Ltd, Alembic Pharmaceuticals Canada Ltd, Alnova Pharmaceuticals SA (Switzerland), and Genius LLC (Ukraine). CRISIL considers these entities as being strategic to Alembic in view of their strong integration with its operations.
CRISIL had applied a moderate consolidation approach for Alembic's four associate companies and joint venture, and has factored in their share in the overall profit, and size of any incremental investment, if required. Alembic Mami SPA is the JV, and Incozen Therapeutics Pvt Ltd, Dahlia Theraputics SA, Rhizen Pharmaceuticals SA and Rhizen Pharmaceuticals Inc, are the associate companies.
Please refer to Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
* Strong position in the domestic formulations market
The company is among the top 20 players in the domestic formulations market with revenues of Rs 1255 crore for fiscal 2018 and Rs 716 crore for the first half of fiscal 2019. The branded formulations segment is expected to grow at a steady 12-13% per fiscal over the medium term, backed by increased contribution from the chronic therapeutic segment and regular product launches leading to volume growth.
* Increasing presence in the regulated generics market
The international formulations share has increased from fiscal 2016 and was about 40% in fiscal 2018 and 47% in the first half of fiscal 2019. From about 20% share historically, this segment has grown multi-fold through accelerated R&D and ANDA fillings in the US market. Revenue was flattish in fiscal 2018 due to price erosion in the US market. However, it grew over 70% in the first half of fiscal 2019 because of one-off opportunity and price increase in the base portfolio. Annual ANDA filings of 20-25 and about 15 product launches every year in the US will keep the growth momentum at about 12% annually over the medium term. Recent capex for setting up units for injectables (oncology and general), dermatology products, oral solids, and bulk drugs are for regulated markets, primarily the US.
* Healthy financial risk profile
Financial risk profile is supported by high cash accrual, sound capital structure (gearing of 0.45 time as on September 30, 2018, and large networth (Rs 2,220 crore as on March 31, 2018). The company's large capex of Rs 1,200 crore is nearly complete and the annual capex is expected to be around Rs 500-550 crore. Any larger-than-expected debt-funded capex or acquisition will remain a rating sensitivity factor. Gearing may increase marginally, due to higher dependence on working capital debt, yet remain around 0.5 time in the medium term.
* Moderate profitability due to high R&D expenditure
While the share of the high-margin international segment has been increasing over the past few fiscals, operating margin has remained at 19-20% because of high R&D spend. R&D has been stepped-up particularly in the past two fiscals, to capitalise on differentiated generics opportunities in the US.
* Exposure to intensifying pricing pressure and regulatory risks
The company is exposed to regulatory changes in the Indian and global markets. These are reflected in increasing scrutiny and inspections by authorities including the US Food and Drug Administration (FDA), European Medicines Agency, and TGA Australia. However, the regulatory track record has so far been relatively unblemished, particularly with the US FDA. In October 2018, the formulations facility at Panelav, Gujarat, received four procedural observations under form 483. Closure of observations will remain a monitorable. In the domestic market, regulatory impact of drug price control order (DPCO) and ban on some Fixed Dose Combinations (FDC) had an adverse effect on revenue and profit in the past; and may continue to constrain growth in the medium term.
* High acute therapeutic segment share in the domestic formulations market
Therapeutic coverage in the domestic formulations market is dominated by the acute therapy and the anti-infective segments. The portfolio remains significant in the acute segment (40%% of domestic formulation sales in the first half of fiscal 2019), with top five brands from it accounting for nearly 40% of domestic revenue. The significant revenue share from this slow-growing segment exposes the company to pricing pressure as many companies compete in a mature segment. With a quarter of domestic revenue under DPCO, turnover and profitability remain susceptible to regulatory changes.
Outlook: Stable

CRISIL believes Alembic will sustain its business risk profile over the medium term, as increasing contribution from the global market and the domestic chronic therapeutic segment should lead to steady increase in scale of operations and profitability.
Upward scenario
* Sustainable, healthy revenue growth led by the international segment
* Significant and sustainable increase in operating margin
* Maintenance of prudent working capital management and gearing
Downward scenario
* Higher-than-expected gearing led by large capex or acquisition, or stretch in working capital cycle
* Slower revenue growth or sustained decline in operating margin
Liquidity is adequate, backed by healthy net cash accrual, prudent working capital management and low bank limit utilisation. Liquid surplus was Rs 74.1 crore as on September 30, 2018, and net cash accrual was healthy at Rs 428 crore in fiscal 2018. Low gearing and a high networth provide strong financial flexibility. Alembic's bank limits were utilized at an average of 16% over the 12 months ended August 2018. Cash accrual is expected to be Rs 400-500 crore annually over the medium term, backed by steady improvement in the regulated generics business, and a strong presence in the domestic formulations market. Working capital requirement is expected to be higher over the medium term, with increasing presence in the US. Term debt repayment of Rs 200 crore is expected in fiscal 2020 (nil in fiscal 2019). With cash accrual expected to be utilised towards capex (Rs 500-550 crore annually) and incremental working capital requirement, reliance on debt (both long-term and working capital) is expected to increase.  However, led by moderate gross current assets of 230-240 days and strong financial flexibility, liquidity will remain adequate over the medium term.

About the Company

The pharmaceuticals business of Alembic Ltd (AL), consisting of domestic formulations, international generics, and active pharmaceutical ingredients, was transferred to Alembic following the latter's demerger from AL effective from April 1, 2010. Alembic, promoted by the Vadodara, Gujarat-based Amin family, manufactures a range of formulations and bulk drugs for the domestic and international markets. In April 2007, AL acquired the non-oncology business of Dabur Pharma Ltd, thereby gaining access to lifestyle-related therapeutic segments such as cardiovascular, diabetic, gastrointestinal, and gynaecology.
Alembic is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2018, promoter and promoter group entities held about 73% stake, followed by foreign portfolio investors with 9%; mutual funds, banks, financial institutions, and general public held the rest.
For the first six months of fiscal 2019, on a consolidated basis, profit after tax (PAT) was Rs 290.5 crore on total operating income of Rs 1989.6 crore, as against PAT of Rs 188.3 crore on total operating income of Rs 1437.5 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/For the period ended March 31 2018 2017
Revenue Rs crore 3131 3106
Adjusted profit after tax (PAT) Rs crore 413 403
Adjusted PAT margin % 13.2 13.0
Adjusted debt/adjusted networth Times 0.32 0.05
Interest coverage Times 189 120

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 crore) Rating assigned with outlook
NA Cash credit & working capital demand loan ** NA NA NA 350.00 CRISIL AA+/Stable
NA Term loan - 1 NA NA Jan - 2020 200.00 CRISIL AA+/Stable
NA Term loan - 2 NA NA Dec - 2020 100.00 CRISIL AA+/Stable
NA Term loan - 3 NA NA Dec - 2020 200.00 CRISIL AA+/Stable
NA Commercial paper NA NA 7-365 days 500.00 CRISIL A1+
NA Non convertible debentures* NA NA NA 300.00 CRISIL AA+/Stable
NA Non convertible debentures* NA NA NA 200.00 CRISIL AA+/Stable
**100% interchangeability between funded and non-funded
*Not yet placed

Annexure - Details of consolidation
Type of consolidation Companies
Fully consolidated Alembic Global Holding SA
AG Research Private Limited
Aleor Dermaceuticals Limited
Alembic Pharmaceuticals Australia Pty Ltd
Alembic Pharmaceutical Inc.
Alembic Pharmaceuticals Europe Limited
Alnova Pharmaceuticals SA
Alembic Pharmaceuticals Canada Ltd
Genius LLC
Moderately consolidated Incozen Therapeutics Pvt Limited
Dahlia Theraputics SA
Rhizen Pharmaceuticals SA
Rhizen Pharmaceuticals Inc
Alembic Mami SPA
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  500.00  CRISIL A1+  17-10-18  CRISIL A1+    --    --    --  -- 
        04-09-18  CRISIL A1+               
        25-06-18  CRISIL A1+               
        03-05-18  CRISIL A1+               
        10-01-18  CRISIL A1+               
Non Convertible Debentures  LT  0.00
CRISIL AA+/Stable  17-10-18  CRISIL AA+/Stable    --    --    --  -- 
        04-09-18  CRISIL AA+/Stable               
Short Term Debt (Including Commercial Paper)  ST          30-10-17  CRISIL A1+  10-11-16  CRISIL A1+  23-12-15  CRISIL A1+  CRISIL A1+ 
            01-08-17  CRISIL A1+      16-12-15  CRISIL A1+   
            14-07-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  850.00  CRISIL AA+/Stable  17-10-18  CRISIL AA+/Stable  30-10-17  CRISIL AA+/Stable  10-11-16  CRISIL AA/Positive  23-12-15  CRISIL AA/Positive  CRISIL AA/Stable 
        04-09-18  CRISIL AA+/Stable  01-08-17  CRISIL AA+/Stable      16-12-15  CRISIL AA/Positive   
        25-06-18  CRISIL AA+/Stable  14-07-17  CRISIL AA+/Stable           
        03-05-18  CRISIL AA+/Stable               
        10-01-18  CRISIL AA+/Stable               
Non Fund-based Bank Facilities  LT/ST    --    --    --  10-11-16  CRISIL A1+  23-12-15  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 & Working Capital demand loan** 350 CRISIL AA+/Stable Cash Credit & Working Capital demand loan** 350 CRISIL AA+/Stable
Term Loan 500 CRISIL AA+/Stable Term Loan 500 CRISIL AA+/Stable
Total 850 -- Total 850 --
**100% interchangeability between funded and non-funded
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
Understanding CRISILs Ratings and Rating Scales

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