| Alkem Laboratories Limited | ||||||
| Long-term rating upgraded to 'CRISIL AA+/Stable'; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has upgraded its rating on long-term bank facilities of Alkem Laboratories Limited (Alkem) to 'CRISIL AA+/Stable' from 'CRISIL AA/Positive', and reaffirmed the rating on the short-term facility and debt programme at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Alkem and its 20 subsidiaries and step-down subsidiaries. This is because all these entities, collectively referred to as Alkem, operate in the pharmaceutical and related businesses, and have significant operational linkages and a common management. CRISIL has amortised goodwill on consolidation over five years - profit after tax and networth are adjusted to that extent. |
| Key Rating Drivers & Detailed Description |
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Strengths * Established market position Alkem ranks fifth (Source: Company Annual Report, IMS TSA Moving Average Total (MAT), March 2017) in the domestic formulations market, with strong position in antibiotics, non-steroidal anti-inflammatory drugs (NSAIDs), and gastroenterology. Its leading antibiotic brand, Clavam, is the second-largest-selling brand in the molecule category (as per IMS TSA MAT March 2017). Alkem has other leading brands, Taxim and Taxim-O, with a total 14 brands that feature among the top 300 revenue-generating brands in India (IMS Health, March 2017). The company has maintained its peak rank in anti-infective therapy and third position in gastro-intestinal and pain/analgesics therapies. * Strong financial risk profile Adjusted gearing was conservative at less than 0.20 time as on March 31, 2017. It plans to substantially liquidate investment of Rs 193.4 crore (fair value of Rs 275.60 crore) in a real estate fund. Annual capital expenditure (capex) of Rs 600-700 crore expected to be prudently funded through internal accrual and debt. As revenue contribution of the international market increases, working capital cycle is likely to be stretched. Gross current assets were 156 days as on March 31, 2017, due to receivables and inventory of 45 days and 94 days, respectively. Efficient management of working capital will be a key monitorable. Financial risk profile, however, should remain healthy, backed by steady cash flow over the medium term. * Adequate liquidity Expected cash accrual of over Rs 800 crore will be more than sufficient to repay debt of Rs 5.53 crore and Rs 167.6 crore for fiscals 2018 and 2019, respectively. Also, utilisation of fund-based bank limit was modest at about 52% for the 12 months ended June 2017. Liquid surplus and unencumbered marketable investments of Rs 502 crore as on March 31, 2017 (excluding investments in real estate fund), also support liquidity. Weakness * High dependence on the acute therapeutic segments and domestic market A sizeable proportion of revenue comes from the slow-growing acute therapeutic segments (about 85% of domestic revenue in fiscal 2017) such as anti-infective and pain management, in the domestic market. This exposes the company to pricing pressure given intense competition; with a high proportion of products under price control. In recent years, Alkem has ventured into the fast-growing cardiovascular, neuropsychiatry, and oncology segments. Of the 6500 sales representative, about 1500 are in the chronic segment. Although Alkem has created separate divisions to focus on the chronic therapeutic segment, contribution from this may continue to be substantial over the medium term. * Exposure to risks related to regulatory changes Alkem is susceptible to regulatory changes in the Indian and global markets. Additions to lists under DPCO impacts product pricing and hence profitability of players, 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 US Food Drug Administration, European Medical Agency, and Therapeutic Goods Administration, Australia. However, Alkem's track record has remained unblemished with no major issues. |
| Outlook: Stable |
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CRISIL believes Alkem's business risk profile will sustain over the medium term, led by high double-digit growth of both the domestic and international segments, gradual diversification of revenue profile, and sustenance of operating margin at 17-18% over the medium term. |
| About the Company |
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Incorporated in 1973 and promoted by Mr Samprada Singh and his cousin, 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 Asia-Pacific region, Latin America, Africa, and the Commonwealth of Independent States. |
| Key Financial Indicators | ||||||||||||||||||||||||
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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) | |||||||||||||||||||||||||||||||||||
#Letter of credit can be wholly utilised as cash credit limit |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
#Letter of credit can be wholly utilised as cash credit limit | ||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
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