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 2022, operating income grew by 20% to Rs 10,643 crore, mainly driven by growth in the domestic market backed by strong volume growth on a lower base of the previous fiscal, partially led by Covid-19 tailwinds in the acute therapeutic segments. The company’s domestic portfolio is highly concentrated in acute segments, which contributed about 85% to the domestic revenue in fiscal 2022. Sales from the US market witnessed degrowth in fiscal 2022 because of high price erosion, which has continued in the first quarter of fiscal 2023.

 

The domestic segment is expected to continue steady revenue growth this fiscal too, on a high base of the previous fiscal, backed by price hikes undertaken across the product portfolio and the company’s leadership position in key therapeutic areas. While Alkem has a healthy product pipeline, the US market faces challenges on account of high price erosion continuing this fiscal.

 

Operating margin declined to 19.4% in fiscal 2022 and even further in the first quarter of fiscal 2023 from 22.5% in fiscal 2021, mainly on account surge in prices of key starting materials, active pharmaceutical ingredients, freight cost and revival in marketing and selling expenses. Operating margin is expected to remain at 17-19% in the near term given the sustained high raw material cost and pricing pressure in the US.

 

The financial risk profile is strong, with adjusted gearing of 0.31 time as on March 31, 2022. Debt increased as on March 31, 2022, mainly on account of higher working capital requirement. Gearing is expected to remain below 0.2 time over the medium term. Capital expenditure (capex) of ~Rs 300 crore in fiscal 2023 is expected to be prudently funded through internal accrual and liquid 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 and its 26 subsidiaries and step-down subsidiaries. This is because all these entities, collectively referred to as Alkem, operate in the pharmaceuticals and related industries and have significant operational linkages and a common management. CRISIL Ratings has amortised goodwill on consolidation over five years; profit after tax (PAT) 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:

• Established market position: Alkem ranks fifth as per the IQVIA Moving Average Total [MAT], March 2022 (source: Company Annual Report), in the domestic formulations market, with a strong position in the anti-infectives, pain/analgesics and gastro-intestinal segments. Its leading brand, Clavam, is the second-largest-selling brand in the molecule category (as per IQVIA MAT March 2022). Alkem has other leading brands, Pan, Pan-D, Xone and Taxim-O, among the six brands that feature in the top 100 revenue-generating brands in India. The company has maintained its leading rank in anti-infective therapy and is among the top three in gastro-intestinal, vitamins/minerals/nutrients and pain/analgesics therapies.

 

• Strong financial risk profile: Adjusted gearing stood at 0.31 time as on March 31, 2022 (0.24 time a year earlier). Debt increased as on March 31, 2022, mainly on account of large working capital requirement. Gross current assets were ~225 days as on March 31, 2022, driven by receivables and inventory of 65 and 128 days, respectively. Working capital requirement is expected to remain moderate in the near term on account of higher inventory being maintained by the company to avoid any production disruption. Efficient working capital management will be a key monitorable. Annual capex of ~Rs 300 crore is expected to be prudently funded through internal accrual. The financial risk profile should remain strong over the medium term, supported by expected gearing of below 0.2 time and steady cash flow. The company’s plans to liquidate its investment of about Rs 107 crore (as on March 31, 2022) in a real estate fund is contingent upon pick-up in the real estate sector and will remain a key monitorable.

 

Weaknesses:

• High dependence on the acute therapeutic segment and the domestic market: Sales in the domestic market formed ~70% of the overall revenue for Alkem in fiscal 2022. Also, a sizeable proportion of this revenue (about 85% in fiscal 2022) is derived from the slow-growing acute therapeutic segment, such as anti-infectives and pain/analgesics. This exposes the company to pricing pressure amid intense competition, with about 30% of the products under price control. In recent years, Alkem has ventured into the fast-growing cardiovascular, neuropsychiatry and oncology segments. The company has over 10,000 sales representatives, of which about 15% are in the chronic segment. Although Alkem has created separate divisions 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 as well as international markets will remain a key monitorable.

 

• Exposure to risks related to regulatory changes: The company is susceptible to regulatory changes in the Indian and global markets. Additions to lists under DPCO affect product pricing and, hence, profitability, though the extent of impact may differ. In fiscal 2017, price ceilings were brought about for another 100 products, thereby affecting domestic revenue growth. In the international market, regulatory risks are manifested by increasing scrutiny and inspections by the United States Food and Drug Administration (USFDA), European Medical Agency and Therapeutic Goods Administration, Australia. The company’s facility at St Louis, USA, and Indore received a few observations from the USFDA following an inspection in June 2022, for which the company is taking remediation measures. Resolution of USFDA issue and product launches would be critical for revenue growth in the US market and will remain key monitorables.

Liquidity: Strong

Cash accrual, expected at over Rs 1,350 crore per annum, should be sufficient to cover moderate annual capex of ~Rs 300 crore in the absence of any debt obligation over the next few years. Liquidity is also supported by unencumbered cash surplus of around Rs 1,850 crore as on March 31, 2022 (excluding real estate investment). Utilisation of the sanctioned working capital limit averaged 44% over the 12 months ended June 30, 2022. 

Outlook: Stable

The business risk profile of Alkem will remain stable over the medium term, led by its established market position and sustained healthy operating profitability over the medium term.

Rating Sensitivity factors

Upward factors

• Sustained healthy revenue growth of over 15% annually alongwith increased revenue contribution from international market
• Strong and sustained improvement in the operating margin, led by higher share of chronic therapies in the domestic market
• Stable financial risk profile, backed by efficient working capital management

 

Downward factors

• Decline in operating margin below 13% on a sustained basis
• Subdued revenue growth because of high competition or downward price revisions
• Larger-than-expected debt-funded capex or acquisition or real estate investments adversely affecting capital structure or debt protection metrics

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 formulations market in India. It is present in therapeutic segments, including antibiotics, non-steroidal anti-inflammatory drugs, 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, Pune; and at St Louis in Missouri, USA. Facilities for active pharmaceutical ingredients are in Mandva and Ankleshwar in Gujarat and in California, USA. Also, Alkem 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 June 30, 2022, the promoters and their entities held 57.14%, institutional investors held 19.77%, and the remaining was held by the public and others.

 

In the first quarter of fiscal 2023, the company reported revenue of Rs 2,576 crore (Rs 2,731 crore in the corresponding period of fiscal 2022) and unadjusted net profit of Rs 131 crore (Rs 480 crore).

Key Financial Indicators (consolidated)

As on/For the period ended March 31		2022	2021
Revenue	Rs crore	10,643	8,869
Adjusted PAT*	Rs crore	1,670	1,604
Adjusted PAT margin	%	15.7	18.1
Adjusted debt/adjusted networth	Times	0.31	0.24
Adjusted interest coverage	Times	41.9	36.2

*Adjusted for amortisation of goodwill

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  levels	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	25	NA	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	100	NA	CRISIL AA+/Stable
NA	Letter of Credit#	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Export Credit Facility@	NA	NA	NA	180	NA	CRISIL AA+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	20	NA	CRISIL AA+/Stable
NA	Commercial Paper	NA	NA	7-365 days	500	Simple	CRISIL A1+

*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