Rating Rationale
July 22, 2019 | Mumbai
Alembic Pharmaceuticals Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.550 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.200 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.750 Crore Commercial Paper (Enhanced from Rs.500 Crore) 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 debt instruments of Alembic Pharmaceuticals Limited (Alembic) at 'CRISIL AA+/Stable/CRISIL A1+'.
The ratings continue to reflect the company's strong position in the domestic formulations market, growing presence in the international generics segment, and healthy financial risk profile. These strengths are partially offset by moderate profitability due to sizeable research and development (R&D) expenditure, high share of the acute therapeutic segment in domestic formulations, and exposure to intensifying pricing pressure and regulatory risks.
In fiscal 2019, Alembic capitalised on shortage of the hypertension drug, Valsartan, in the US, which led to healthy growth in revenue and sustained profitability.  Revenue rose by 26% in fiscal 2019 year-on-year, driven by 48% growth in international formulations. Domestic formulations grew 9% during the fiscal.
Operating margin was healthy at 22% in fiscal 2019 against 21% the previous fiscal. Steady demand for current products and fresh product launches in the international and domestic segments should support growth momentum over the medium term. Operating margin should sustain at 19-20%, given the price correction in the US and elevated R&D requirement (about 13% of sales), driven by focus on building abbreviated new drug applications (ANDAs), particularly for specialised generics.
Working capital requirement may remain high over the medium term due to Alembic's increasing presence in the US. Gross current assets are expected at 180-200 days over the medium term (181 days as on March 31, 2019).  The company continues to incur sizeable debt funded capital expenditure (capex) annually, primarily towards specialised generics. Capex of Rs 790 crore was incurred in fiscal 2019, to be followed by planned capex of Rs 600 crore in fiscal 2020. Nonetheless, capital structure is expected to remain healthy, with comfortable networth and gearing of 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. CRISIL 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 is factored in.
Please refer to Annexure - List of entities consolidated, 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: revenue was Rs 1,382 crore in fiscal 2019. Growth in the branded formulations segment should maintain pace with the industry, backed by increased contribution from the chronic therapeutic segment and regular product launches, leading to volume growth.

* Increasing presence in the regulated generics market:
On account of greater focus on the US, the company has gradually stepped up its ANDA filings in the last few years: 29 in fiscal 2019 from 8 in fiscal 2016. R&D expenditure should remain high, forming about 13% of the net sales. Revenue from the international market (including bulk drugs) was 65% of the total revenue in fiscal 2019 (59% in fiscal 2018).  Turnover saw a sharp increase in fiscal 2019 on account of a one-time opportunity and may remain steady in fiscal 2020 because of base effect. However, revenue growth may recover in the medium term, with regular ANDA filings and entry into specialised generics. Recent capex includes setting up units for injectables (oncology and general), oncology oral solids, dermatology products, oral solids, ophthalmology, and bulk drugs for regulated markets, primarily the US.

* Healthy financial risk profile
Financial risk profile is healthy: gearing and networth were 0.46 time and Rs 2,448 crore, respectively, as on March 31, 2019. The company has nearly completed its large capex of around Rs 2,000 crore towards specialised generics, which commenced in fiscal 2016. In fiscal 2020, the company plans to incur capex of Rs 600 crore for additional lines. After fiscal 2020, annual capex is expected at Rs 400-450 crore over the medium term. Any larger-than-expected capex or acquisition remains a key rating sensitivity factor. Gearing, which increased to 0.46 time as on March 31, 2019, against 0.05 time as on March 31, 2017, should remain at around 0.5 time over the medium term because of incremental borrowings to fund the capex.

* 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 profitability stood at 20% because of high R&D expenditure. Spends on R&D have been stepped up, particularly in the past three fiscals, to capitalise on differentiated generics opportunities in the US. Ramp-up of new facilities in differentiated generics will be critical for maintaining profitability.

* 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 track record has been relatively clear so far, particularly with the US FDA. In October 2018, the formulations facility in Panelav, Gujarat, received four procedural observations under form 483. These observations were subsequently cleared with no action indicated. In the domestic market, the regulatory impact of drug price control order (DPCO) and ban on some Fixed Dose Combinations (FDC) adversely affected revenue and profit in the past and may continue to do so over the medium term.

* 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 the anti-infective segments. The portfolio remains significant in the acute segment (40% of domestic formulation sales in fiscal 2019), with the top five brands accounting for nearly 40% of the domestic revenue. Significant share of revenue from this slow-growing segment exposes Alembic to pricing pressure, as several players compete in a mature segment. With a quarter of domestic revenue under DPCO, turnover and profitability remain susceptible to regulatory changes.

Liquidity is adequate, backed by healthy net cash accrual and prudent working capital management. Liquid surplus was Rs 199 crore as on March 31, 2019, and net cash accrual was healthy at Rs 700 crore in fiscal 2019. Low gearing and large networth provide strong financial flexibility. Bank limit utilisation was moderate, averaging 65% over the nine months through May 2019. Cash accrual saw a spike in fiscal 2019 due to a one-time opportunity and is expected at Rs 500-600 crore annually over the medium term, sufficient to cover maturing debt of around Rs 200 crore and 300 crore in fiscals 2020 and 2021, respectively, and fund the incremental working capital requirement. The company will, likely, fund its Rs 600 crore capex in fiscal 2020 through a mix of funds from liquid surplus, cash accrual, and proceeds from non-convertible debentures. 

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 sustained increase in operating margin
* Prudent working capital management and healthy capital structure

Downward scenario
* Higher-than-expected gearing, led by large capex or acquisition or stretch in the working capital cycle
* Slower revenue growth or sustained decline in operating margin

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. Vadodara-based Alembic, promoted by the Amin family, 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, 2018, the promoter and the group entities held an about 73% stake, followed by foreign portfolio investors with 9%; mutual funds, banks, financial institutions, and general public held the rest.

Key Financial Indicators
As on/For the period ended March 31 2019 2018
Revenue Rs crore 3937 3131
Adjusted profit after tax (PAT) Rs crore 583 413
Adjusted PAT margin % 14.8 13.2
Adjusted debt/adjusted networth Times 0.46 0.34
Interest coverage Times 47.46 188.83

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 and working capital demand loan ** NA NA NA 350.00 CRISIL AA+/Stable
NA Term loan NA NA Jan-2020 200.00 CRISIL AA+/Stable
NA Commercial paper NA NA 7-365 days 750.00 CRISIL A1+
INE901L08013 Non-convertible debentures 14-Dec-18 9.00 26-Nov-21 150.00 CRISIL AA+/Stable
INE901L08021 Non-convertible debentures 14-Dec-18 9.00 25-Apr-22 200.00 CRISIL AA+/Stable
INE901L08039 Non-convertible debentures 19-Mar-19 8.37 18-Mar-22 150.00 CRISIL AA+/Stable
NA@ Non-convertible debentures NA NA NA 300.00 CRISIL AA+/Stable
**100% interchangeability between funded and non-funded
@Not yet placed

Annexure - List of entities consolidated
Type of consolidation Companies
Fully consolidated Alembic Global Holding SA
Aleor Dermaceuticals Ltd
Alembic Pharmaceuticals Australia Pty Ltd
Alembic Pharmaceutical Inc
Alembic Pharmaceuticals Europe Ltd
Alnova Pharmaceuticals SA
Alembic Pharmaceuticals Canada Ltd
Genius LLC
Moderately consolidated Incozen Therapeutics Pvt Ltd
Dahlia Theraputics SA
Rhizen Pharmaceuticals SA
Rhizen Pharmaceuticals Inc
Alembic Mami SPA
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  750.00  CRISIL A1+  11-06-19  CRISIL A1+  06-12-18  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  500.00
CRISIL AA+/Stable  11-06-19  CRISIL AA+/Stable  06-12-18  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+  CRISIL A1+ 
                01-08-17  CRISIL A1+       
                14-07-17  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  550.00  CRISIL AA+/Stable  11-06-19  CRISIL AA+/Stable  06-12-18  CRISIL AA+/Stable  30-10-17  CRISIL AA+/Stable  10-11-16  CRISIL AA/Positive  CRISIL AA/Positive 
            17-10-18  CRISIL AA+/Stable  01-08-17  CRISIL AA+/Stable       
            04-09-18  CRISIL AA+/Stable  14-07-17  CRISIL AA+/Stable       
            25-06-18  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+  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 200 CRISIL AA+/Stable Term Loan 200 CRISIL AA+/Stable
-- 0 -- Term Loan 300 Withdrawn
Total 550 -- 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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