Rating Rationale
October 29, 2020 | Mumbai
Alkem Laboratories Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.375 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper of Alkem Laboratories Limited (Alkem).
 
In fiscal 2020, operating income grew by 13.4% to Rs 8,344 crore, driven by growth in the key markets of India and the US. Domestic business (accounting for 67% of total revenues) recorded a growth of about 13% in fiscal 2020. The company's domestic portfolio is highly concentrated in acute therapeutic segments, which contributes about 80% of domestic revenues in fiscal 2020. Consequently, the domestic segment revenues declined by 5.5% for the first three months of fiscal 2021 to Rs 1,155 crore, with lower prescription based sales and lower outpatient department (OPDs) visit amidst lockdown due to Covid-19 pandemic. The company's international business continues to record healthy growth momentum, with 14.4% and 32.8% growth in fiscal 2020 and first three months of fiscal 2021 respectively, driven by new product launches. Domestic sales growth is expected to moderate to 6%-7% in fiscal 2021, due to pandemic and lockdown impact on acute segment, while export sales is expected to be in high double digits backed by healthy product pipeline.
 
Operating margin improved to 18.3% in fiscal 2020 from 15.9% in the previous fiscal on account of continuous focus on cost-optimisation and process improvement. Margin improvement to 26.6% in the first quarter of fiscal 2020 (14.3% in the corresponding period previous fiscal) was one-off, mainly due to lower spends on marketing following the pandemic-induced restrictions. Despite rise in price of active pharmaceutical ingredients, profitability is expected to sustain at about 18% in fiscal 2021.
 
Financial risk profile is strong, with adjusted gearing of 0.28 time as on March 31, 2020, against 0.18 time as on March 31, 2019. Debt increased mainly due to larger working capital requirement towards the end of fiscal 2020 following the nationwide lockdown. Gearing is expected to remain below 0.2 time over the medium term. Capital expenditure (capex) of Rs 280-300 crore in fiscal 2021 is expected to be prudently funded through internal accrual and liquid surplus.
 
The ratings continue to reflect Alkem's established position in the formulations market, and 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

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Alkem and its 21 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 has amortised goodwill on consolidation over five years; profit after tax and networth have been adjusted.

Please refer Annexure - Details of Consolidation, 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 (source: Company Annual Report, IMS Moving Average Total [MAT], March 2020) 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 brand in the molecule category (as per IMS IQVIA MAT March 2020). Alkem has other leading brands, Pan, Pan-D, Xone, Taxim and Taxim-O, among a total of 7 brands that feature in the top 100 revenue-generating brands in India (IMS IQVIA, March 2020). The company has maintained its peak position in anti-infective therapy and third rank in gastro-intestinal and pain/analgesics therapies.
 
* Strong financial risk profile
Adjusted gearing was 0.28 time as on March 31, 2020. Debt increased mainly due to larger working capital requirement towards the end of fiscal 2020 following the nationwide lockdown. Gross current assets were 194 days as on March 31, 2020, driven by receivables and inventory of 73 and 97 days, respectively. As revenue contribution from the international market increases, working capital requirement is expected to increase over the medium term. Efficient working capital management will be a key monitorable. Capex of Rs 280-300 crore in fiscal 2021 is expected to 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's plans to substantially liquidate its investment of about Rs 146 crore 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
A sizeable proportion of revenue comes from the slow-growing acute therapeutic segment (about 80% of the domestic revenue in fiscal 2020), such as anti-infective and pain management. This exposes the company to pricing pressure due to intense competition, with about 28% of the products under price control. In recent years, Alkem has ventured into the fast-growing cardiovascular, neuropsychiatry, and oncology segments. The company has added about 10,000 sales representatives, of which about 20% 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 market as well as the international segment will remain key monitorables.
 
* 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 the 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.
Liquidity Strong

Cash accrual, expected at over Rs 1,000 crore per annum in fiscals 2021 and 2022, should be more than sufficient to cover debt repayment of Rs 38 crore and Rs 20 crore in the corresponding fiscals. Liquidity is also supported by cash surplus of around Rs 1,200 crore as on March 31, 2020 (excluding real estate investment), of which unencumbered cash and bank balance stood at Rs 325 crore. Capex should remain moderate at Rs 280-300 crore in fiscal 2021, likely to be funded through a mix of internal accrual and liquid surplus.

Outlook: Stable

CRISIL believes Alkem's business risk profile will sustain over the medium term, led by its established market position and sustained healthy operating profitability over the medium term.
 
Rating sensitivity factors:
Upward factors
* Diversification of revenue profile with over 40% share from the international market, and sustained growth in revenue
* Strong and sustained improvement in operating margin led by higher share of chronic therapies in the domestic market
* Sustenance of financial risk profile, backed by efficient working capital management
 
Downward factors
* Decline in operating margin below 13% on a sustained basis
* Subdued growth due to 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 India's formulations market. It is present in the therapeutic segments, including antibiotics, NSAIDs, gastroenterology, and antioxidants. The company is also present in the 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), 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 June 30, 2020, the promoters and their entities held 62.43%, institutional investors held 15.76%, and the remaining was held by the public.

Key Financial Indicators - Consolidated
As on/For the period ended March 31 2020 2019
Revenue Rs Cr 8,344 7,357
Adjusted profit after tax* Rs Cr 1,139 753
Adjusted PAT margin % 13.7 10.2
Adjusted debt/adjusted networth Times 0.28 0.18
Interest coverage Times 24.6 22.4
*Adjusted for amortisation of goodwill

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Crore)
Complexity Level 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 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
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Pharmacor Pty Ltd Full Subsidiary
Cachet Pharmaceuticals Pvt Ltd Full Subsidiary
Ascend Laboratories SpA Full Subsidiary
Enzene Biosciences Ltd Full Subsidiary
Ascend Gmbh
(formerly, Alkem Pharma Gmbh)
Full Subsidiary
Indchemie Health Specialities Pvt Ltd Full Subsidiary
The PharmaNetwork, LLP Full Subsidiary
Alkem Laboratories Korea Inc Full Subsidiary
Ascends Laboratories SDN BHD Full Subsidiary
S & B Holdings BV Full Subsidiary
Pharmacor Ltd Full Subsidiary
Alkem Laboratories Corporation Full Subsidiary
S & B Pharma Inc Full Subsidiary
Alkem Laboratories (Pty) Ltd Full Subsidiary
ThePharmaNetwork, LLC Full Step down  Subsidiary
Ascend Laboratories, LLC Full Step down Subsidiary
Ascend Laboratories (UK) Ltd Full Subsidiary
Alkem Foundation Full Subsidiary
Ascend Laboratories Ltd Full Subsidiary
Pharma Network SpA Full Step down subsidiary
Ascend Laboratories SAS Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      09-10-19  CRISIL A1+  30-08-18  CRISIL A1+  24-08-17  CRISIL A1+  CRISIL A1+ 
            16-08-19  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  300.00  CRISIL AA+/Stable      09-10-19  CRISIL AA+/Stable  30-08-18  CRISIL AA+/Stable  24-08-17  CRISIL AA+/Stable  CRISIL AA/Positive 
            16-08-19  CRISIL AA+/Stable           
Non Fund-based Bank Facilities  LT/ST  75.00  CRISIL AA+/Stable/ CRISIL A1+      09-10-19  CRISIL AA+/Stable/ CRISIL A1+  30-08-18  CRISIL AA+/Stable/ CRISIL A1+  24-08-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA/Positive/ CRISIL A1+ 
            16-08-19  CRISIL AA+/Stable/ 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
Bank Guarantee 25 CRISIL A1+ Bank Guarantee 25 CRISIL A1+
Cash Credit* 100 CRISIL AA+/Stable Cash Credit* 100 CRISIL AA+/Stable
Export Packing Credit@ 180 CRISIL AA+/Stable Export Packing Credit@ 180 CRISIL AA+/Stable
Letter of Credit# 50 CRISIL AA+/Stable Letter of Credit# 50 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 20 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 20 CRISIL AA+/Stable
Total 375 -- Total 375 --
*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
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 Criteria for Consolidation
CRISILs Criteria for rating short term debt

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