| Aragen Life Sciences Limited | ||||||
| Rated amount enhanced for Bank Debt | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Positive/CRISIL A1+’ ratings on the bank facilities, non-convertible debentures (NCDs) and commercial paper programme of Aragen Life Sciences Ltd (Aragen Life).
Aragen Life benefits from its diversified clientele, medium-to-long-term contracts with customers and continued client addition, which supports revenue growth and widens the client base. Improving cost-competitiveness vis-a-vis Chinese players and increased focus of global pharmaceutical (pharma) players on outsourcing research and development led to revenue growth of around 25% year-on-year in fiscal 2023. Furthermore, continued healthy demand in the discovery services segment and capacity addition across businesses should aid healthy revenue growth over the medium term.
Operating profitability remained strong at 28.8% in fiscal 2023, driven by sizeable contribution from the high-margin discovery services segment and rapidly growing scale of operations. Operating margin is likely to remain healthy at 28-30% over the medium term.
The financial risk profile is healthy, with tangible networth of Rs 1,045 crore leading to comfortable gearing of 0.51 time as on March 31, 2023. Interest coverage ratio was healthy at over 12 times in fiscal 2023. Aragen Life has stepped up its organic capital expenditure (capex) to ~Rs 400 crore annually, which could be partly debt-funded and may result in some moderation in credit metrics in the near term. Nonetheless, gearing is expected to be below 0.6-0.7 time going forward. In January 2023, the company’s board approved raising capital through an initial public offering (IPO). However, the timeline of the IPO and quantum of funds to be raised is yet to be finalised by the management and will remain a monitorable.
Thus far, Aragen Life has remained ring-fenced from the GVK group and has not provided any temporary or permanent financial support to GVK group companies. CRISIL Ratings is given to understand that the status quo will be maintained by Aragen Life given the presence of Mr Davinder Singh Brar and his family members, with equal stake, and the presence of the private equity investor, Goldman Sachs group, with a significant minority stake. CRISIL Ratings has also noted that in case of another company of the GVK group, the regulatory authorities are investigating the company and its directors, alleging financial irregularities. CRISIL Ratings has been informed that this development will have no impact on the operations of Aragen Life and will continue to monitor any development in this regard.
The ratings continue to reflect the strong market position of Aragen Life in the contract research industry, based predominantly on full-time equivalent (FTE) and fee-based contracts, and healthy financial and liquidity profiles. These strengths are partially offset by susceptibility to regulatory changes and increasing competition and high geographical concentration risk. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Aragen Life and its wholly owned overseas subsidiaries. The entities, collectively referred to as Aragen Life, have the same management, financial linkages and similar businesses.
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: Strong market position in the contract research industry Aragen Life is one of the largest contract research organisations (CROs) in India, with a large clientele that includes several global pharma players. It offers integrated services across the drug discovery and development value chain and provides research services in medicinal chemistry and biology to innovator pharma companies. The company's strong market position is reflected in its large clientele of over 450 companies. Drug discovery services (including the biologics segment) is the major revenue contributor, accounting for ~65% of the company’s revenue in fiscal 2023. This division synthesises compounds and does biology studies and the company, with its strong track record, has continually obtained new projects under the division.
Low-risk business model, predominantly based on FTE and fee-based contracts The company follows a low-risk business model, which involves billing on an FTE basis as well as fee-based contracts. Contracts are typically renewed annually, resulting in stable revenue. The company has a large clientele and has retained 75-80% of its customers over the past several years. It has long-term relationships with clients, resulting in multiple assignments and higher revenue contribution. Also, through diversification of its clientele, the company has reduced customer concentration risk, with the revenue share of the top 10 customers almost halving in the past 4-5 years and contributing 37% of total revenue in fiscal 2023.
Healthy operating profitability Operating efficiency, cost-reduction initiatives and high share of the profitable drug discovery services have enabled Aragen Life’s operating margin to remain healthy at 28.8% in fiscal 2023. Streamlining of operations, better utilisation of capacities and commercialisation of ongoing capex would support steady profitability of 28-30% over the medium term.
Healthy financial risk profile The financial risk profile is backed by healthy cash accrual and prudent capital structure with gearing comfortable at 0.51 time as on March 31, 2023. Given the partial debt-funded acquisition of Intox Pvt Ltd, a pre-clinical CRO, in December 2021, the debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio increased to 1.3 times in fiscal 2022. However, with healthy profitability and successful integration of the acquired business, the debt to Ebitda ratio improved to 1.1 times in fiscal 2023. Interest coverage ratio was robust at over 12 times in fiscal 2023. The company has stepped up its organic capex to ~Rs 400 crore annually, which could be partly debt-funded and may constrain the credit metrics in the near term. Nonetheless, gearing should remain below 0.6-0.7 time and peak debt to Ebidta ratio below 1.5-2.0 times going forward. The company has sizeable contingent liabilities of ~Rs 123 crore related to tax claims that are being contested; a negative verdict requiring large payout by the company will remain a key monitorable.
The private equity firm, the Goldman Sachs group, holds 31.3% stake in the company. CRISIL Ratings understands that there is no obligation on Aragen Life or the promoter family to provide an exit or assured return to Goldman Sachs on its investment, and Goldman Sachs may evaluate its exit through the planned IPO.
Weaknesses: Susceptibility to regulatory changes and increasing competition The CRO industry is highly fragmented owing to low entry barriers. Several large global pharma players are outsourcing contract research activities to India. Hence, more CROs may enter the fray, increasing competition and constraining the pricing flexibility of strong players such as Aragen Life. Additionally, the company faces competition from CROs based in China and Eastern Europe, which may have a broader portfolio of services. Nevertheless, the company benefits from its wide range of service offerings and strong clientele. It is also exposed to stringent regulatory requirement.
High geographical concentration risk Aragen Life derives over 75% of its revenue from US and Europe exposing it to region-specific regulatory and political developments. Large portion of the revenue is expected to come from the US market going forward, in line with the current trend. However, upfront and milestone-based payments from customers should mitigate this risk. Revenue is also susceptible to regulatory and political developments in countries in which its customers are located. As the company derives over 90% of its revenue from the overseas market, its revenue and operating margin remain susceptible to any adverse foreign exchange (forex) movements. However, the company hedges majority of its open forex exposure as per its hedging policies, thus mitigating the risk. |
Liquidity: Strong Consolidated cash accrual is expected to be over Rs 350 crore in fiscal 2024, which will comfortably cover yearly debt obligation of ~Rs 80 crore and partly fund the capex. With gradually increasing cash accrual, CRISIL Ratings expects the company to comfortably meet its NCD repayment of Rs 200 crore in February 2025. Utilisation of the fund-based bank limit was less than 50% on average for the 12 months through June 2023. The company also had a healthy liquid surplus of Rs 171 crore as on March 31, 2023. Dividend payout has been moderate at 25-40% of the net profit over the past few years and is expected to continue at 30% of profit after tax (PAT). |
Outlook: Positive The business risk profile of Aragen Life will continue to improve over the medium term, driven by its strong business model and sustained healthy operating performance. The financial risk profile will remain healthy, supported by steady cash accrual, prudent capital spending and efficient working capital management. |
Rating Sensitivity factors Upward factors
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About the Company Aragen Life, incorporated in 2000, is an integrated contract research and development organisation, which provides drug discovery and development services to pharma, agro chemical and biotech companies. It provides end-to-end and integrated services across the value chain, from drug discovery to commercial manufacturing. The company provides medicinal chemistry services, biology services, scale-up technologies, formulation and analytical services, process research development and custom chemical synthesis. It also manufactures active pharmaceutical ingredients (APIs) and API intermediates. It has over 450 clients, including 7 of the top 10 global pharma companies. The company has more than 4,000 employees, with facilities in Hyderabad, Bengaluru, Pune and Visakhapatnam and in Morgan Hill, California. The company got its current name in December 2020 (it was previously known as GVK Biosciences Pvt Ltd). In January 2023, the company’s board approved conversion into a public limited company. The wholly owned subsidiary, Aragen Bioscience, is a privately held, US-based, pre-clinical CRO specialising in high-value biologics services.
As on March 31, 2023, Mr Davinder Brar, his family members and Reddy Investment Trust directly and indirectly held 33.7% shares each in the company; 31.3% was held by the Goldman Sachs group and the remaining was held by GVK Bio Employee Welfare Trust and others. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
* Fully interchangeable with letter of credit/buyers’ credit/bank guarantee @ Fully interchangeable with buyers' credit/bank guarantee ^Yet to be placed ^^Rs 200 crore NCD placed, Rs 100 crore NCD yet to be placed |
Annexure – List of entities consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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