Rating Rationale
October 17, 2018 | Mumbai
Alembic Pharmaceuticals Limited
Rated amount enhanced 
Rating Action
Total Bank Loan Facilities Rated Rs.850 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Rs.300 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
Rs.500 Crore Commercial Paper (Enhanced from Rs.300 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, increasing 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 acute therapeutic segment share in domestic formulations, and exposure to intensifying pricing pressure and regulatory risks.

Revenue remained flat in fiscal 2018 compared to the previous fiscal, on account of destocking in the first quarter before rollout of the goods and service tax (GST) in the domestic market and price erosion in the US market. Domestic formulations grew 2% during the fiscal while international formulations declined 3%. The operating margin, however, remained in-line with expectation at 21%, led by cost-cutting measures and relatively lower R&D of 13% of sales. Revenue is expected to grow 11-12% over 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%, given the elevated R&D requirement (about 14% of sales) with the focus on building abbreviated new drug applications (ANDAs), particularly for specialised generics.

Working capital requirement is expected to be higher over the medium term, with increasing presence in the US. Gross current assets (GCA) is expected to increase to about 240 days over the medium term (210 days as on March 31, 2018).  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 the ratings, CRISIL has combined the business and financial risk profiles of Alembic and its subsidiaries, Alembic Global Holding SA (Switzerland), AG Research Pvt Ltd (Hyderabad), and Aleor Dermaceuticals Ltd; and step-down subsidiaries, Alembic Pharmaceuticals Australia Pty Ltd, Alembic Pharmaceuticals Inc, Alembic Pharmaceuticals Europe Ltd, Alembic Pharmaceuticals Canada Ltd, Alnova Pharmaceuticals SA (Switzerland), and Genius LLC (Ukraine). For associate companies, CRISIL follows a moderate consolidation approach - specifically, share in profit and share of any incremental investment required are factored in. 

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. 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
On account of greater focus on the US market, the company has stepped up its ANDA filings in the last few years ' 26 in fiscal 2018, from 20 and 8 in fiscals 2017 and 2016, respectively. The R&D expenditure is, therefore, expected at Rs 500-550 crore per fiscal (14% of net sales). Revenue from the international market (including bulk drugs) was 59% of total revenue in fiscal 2018 (60% in fiscal 2017). Revenue was flattish in fiscal 2018 due to price erosion in the US market. Revenue growth is expected to recover over the medium term with regular ANDA filings and improvement in product approval cycle with the implementation of the generic drug user fee amendment (GDUFA). 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 0.32 time as on March 31, 2018, against 0.05 time as on March 31, 2017), and large networth (Rs 2220 crore as on March 31, 2018). The company has large ongoing capex of Rs 1,200 crore (commenced in fiscal 2016 and about 70% complete till fiscal 2018) and regular annual maintenance capex. With the project expected to be completed in fiscal 2019, the annual capex is expected to be at Rs 400 crore over the medium term. Any larger-than-expected debt-funded capex or acquisition will remain a rating sensitivity factor. Gearing is expected to marginally increase but still remain around 0.5 time over the medium term because of incremental working capital requirement.

* 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. Given the higher R&D spend, margin is expected to be moderate at 19% over the medium term.

* 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 March 2018, the formulations facility in Panelav, Gujarat, received three observations under form 483; the company has responded to these. Closure of the 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) has adversely affected revenue and profits in the past; and may continue to do so over 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 (50% of domestic formulation sales in fiscal 2018), 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.

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 three months of fiscal 2019, on a consolidated basis, profit after tax (PAT) was Rs 90.45 crore on total operating income of Rs 862.53 crore, as against PAT of Rs 66.66 crore on total operating income of Rs 648.19 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 189 119.7

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.Cr 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
**100% interchangeability between funded and non-funded
@Not yet placed
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+  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  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  04-09-18  CRISIL AA+/Stable  30-10-17  CRISIL AA+/Stable  10-11-16  CRISIL AA/Positive  23-12-15  CRISIL AA/Positive  CRISIL AA/Stable 
        25-06-18  CRISIL AA+/Stable  01-08-17  CRISIL AA+/Stable      16-12-15  CRISIL AA/Positive   
        03-05-18  CRISIL AA+/Stable  14-07-17  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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