| Alkem Laboratories Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Alkem Laboratories Limited (Alkem).
In fiscal 2021, operating income rose by 7% to Rs 8,869 crore, mainly driven by the US market, which grew by 11%, supported by new product launches. The domestic portfolio of Alkem is highly concentrated in acute therapeutic segments, which contributed about 80% of domestic revenue in fiscal 2021. Consequently, the domestic segment revenues grew at a lower rate of 5% in fiscal 2021, with lower prescription-based sales and outpatient department (OPD) visits, amidst the lockdown following the Covid-19 pandemic.
The domestic segment is expected to register double-digit revenue growth in fiscal 2022, backed by the leadership position of Alkem in key therapeutic areas and healthy demand post the pandemic. Though the company has a healthy product pipeline, revenue growth in the US market could face challenges on account of high price erosion persisting this fiscal. The US facility at St Louis received few observations from the United States Food and Drug Administration (USFDA) post inspection, wherein the company has taken remediation measures. The resolution of USFDA issue and new product launches are critical for revenue growth in the US, and remain key monitorables.
Operating margin improved to 22.5% in fiscal 2021, from 18.3% in the previous fiscal, mainly on account of lower marketing and selling expenses amidst travel restrictions induced by the pandemic. The margin moderated to 21.7% in the first quarter of fiscal 2022, and should remain around 20% in the near term, given the revival in marketing expenses. Operating profitability could also be impacted by the recent surge in price of key starting materials (KSM) and active pharmaceutical ingredients (API) imported from China.
Financial risk profile is strong, with adjusted gearing of 0.24 time as on March 31, 2021, against 0.28 time as on March 31, 2020. Debt increased marginally mainly due to large working capital requirement specifically inventory in the last fiscal. Gearing may remain below 0.2 time over the medium term. Capital expenditure (capex) of nearly Rs 300 crore in fiscal 2022, is likely to be funded prudently through internal accrual and cash surplus.
The ratings continue to reflect the established position of Alkem in the formulations market and its strong financial risk profile. These strengths are partially offset by high dependence on the acute therapeutic segment in the domestic market and susceptibility to regulatory changes, including price revisions under the drug price control order (DPCO). |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Alkem Laboratories and its 23 subsidiaries and step-down subsidiaries to arrive at the ratings. This is because all these entities, collectively referred to as Alkem, operate in the pharmaceuticals and related industries, with significant operational linkages under a common management. Goodwill on consolidation has been amortised over five years; profit after tax and networth have been adjusted.
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:
Alkem ranks fifth (source: Company Annual Report, IQVIA Moving Average Total [MAT], March 2021) in the domestic formulations market, with a strong position in the antibiotics, non-steroidal anti-inflammatory drugs (NSAIDs) and gastroenterology segments. Its leading antibiotic brand, Clavam, is the second-largest-selling in the molecule category (as per IMS IQVIA MAT March 2021). Alkem has other leading brands, Pan, Pan-D, Xone, Taxim and Taxim-O, among a total of seven brands that feature in the top 100 revenue-generating brands in India (IQVIA, March 2021). The company has maintained its peak position in anti-infective therapy and the third rank in gastro-intestinal and pain/analgesics therapies.
Adjusted gearing was low at 0.24 time as on March 31, 2021. Debt increased marginally mainly due to larger working capital requirement. Gross current assets (net off cash) were 193 days as on March 31, 2021, driven by receivables and inventory of 67 and 123 days, respectively. With growing revenue contribution from the international market, working capital requirement may also increase over the medium term. Efficient working capital management will be a key monitorable. Capex of nearly Rs 300 crore in fiscal 2022, will be prudently funded through internal accrual and liquid surplus. Financial risk profile, nonetheless, should remain strong over the medium term, with gearing expected below 0.2 time and steady cash flows. Alkem plans to substantially liquidate its investment of about Rs 129 crore in a real estate fund contingent upon pick-up in the real estate sector.
Weaknesses:
The slow-growing acute therapeutic segment, which comprises anti-infective and pain management drugs, accounts for a sizeable proportion of revenue (about 80% in fiscal 2021). Intense competition exposes the company to pricing pressure, with about 30% of products under price control. Alkem has recently ventured into the fast-growing cardiovascular, neuropsychiatry and oncology segments and has added about 10,000 sales representatives, with about 20% in the chronic segment. Although separate divisions have been created to focus on the chronic therapeutic segment, contribution from the acute sector may continue to be significant over the medium term. Revenue diversification into the chronic segment in the domestic and international segments will remain key monitorables.
The company remains susceptible to regulatory changes in the domestic and international markets. Additions to lists under DPCO affect product pricing and hence, profitability, though the extent of the impact may differ. In fiscal 2017, price ceilings were imposed on 100 more products, thereby affecting domestic revenue growth. In the international market, regulatory risks are manifested by increasing scrutiny and inspections by the USFDA, European Medical Agency, and Therapeutic Goods Administration, Australia. The US facility at St Louis received few observations from the USFDA, post which the company has taken remediation measures. The resolution of USFDA issue and new product launches would be critical for revenue growth in the US market. |
Liquidity: Strong Cash accrual of over Rs 1,300 crore expected in fiscal 2022, should more than suffice to cover debt repayment of Rs 55 crore (already repaid as on September 30, 2021). Unencumbered cash surplus was around Rs 1,600 crore as on March 31, 2021 (excluding the real estate investment). Moderate capex of around Rs 300 crore in fiscal 2022, should be funded through a mix of internal accrual and cash surplus. |
Outlook: Stable CRISIL Ratings believes the business risk profile of Alkem will sustain over the medium term, led by its established market position and sustenance of healthy operating margin over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company Incorporated in 1973 and promoted by the late Mr Samprada Singh and Mr Basudeo N Singh, Alkem is among the top 10 players in India’s formulations market. It is present in the therapeutic segments, including antibiotics, NSAIDs, gastroenterology and antioxidants. The company is also present in chronic segments such as neuropsychiatry, cardiovascular and oncology. It exports to the US, countries in the Asia-Pacific region, Latin America, Africa, and the Commonwealth of Independent States.
Manufacturing facilities for formulations are in Baddi (Himachal Pradesh), Indore (Madhya Pradesh), Sikkim, Daman, and St Louis (Missouri, the USA); and active pharmaceutical ingredient facilities in Mandva (Gujarat), Ankleshwar (Gujarat), and California (the USA). Also, it has four research and development facilities across India and the US.
The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2021, the promoters and their entities held 58.84%, institutional investors held 19.32%, and the remaining was held by the public and others. |
Key Financial Indicators (Consolidated):
*Adjusted for amortisation of goodwill | ||||||||||||||||||||||||
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
*Includes Rs 15 crore export packing credit and pre-shipment credit limit #Letter of credit can be wholly utilised as cash credit limit @These limits are interchangeable with working capital demand loan |
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||
|
*Includes Rs 15 crore export packing credit and pre-shipment credit limit
#Letter of credit can be wholly utilised as cash credit limit
@These limits are interchangeable with working capital demand loan
Criteria Details
|