| Aragen Life Sciences Limited | ||||||
| Ratings reaffirmed at 'Crisil AA-/Positive/Crisil A1+' | ||||||
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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 and debt instruments of Aragen Life Sciences Limited (Aragen Life).
The ratings continue to reflect the expectation of sustained improvement in operating performance, with double-digit growth in revenue and high profitability; to be aided by its strong research and development (R&D) capabilities. Aragen Life benefits from the strong market position in the contract research industry, based predominantly on full-time equivalent (FTE) and fee-based contracts, its diversified clientele, medium-to-long-term contracts with customers and continued client addition, which supports revenue growth and widens the clientele. These strengths are partially offset by susceptibility to regulatory changes and increasing competition and high geographic concentration risk. This investment shall further strengthen the financial risk profile of the company, with an estimated tangible networth of over Rs 1,900 crore as on March 31, 2025. The overall net debt position is estimated to improve to below Rs 100 crore as on March 31, 2025. To address the growing demand, the company budgets to incur capital expenditure (capex) of ~Rs 550 crore in FY2025 and over Rs 400-500 crore annually thereafter, which shall be funded through a mix of the capital infusion received, cash accruals generated from operations and debt. In January 2023, the company’s board had approved raising capital through an initial public offering (IPO). However, the timeline of the IPO and quantum of fund raise are yet to be finalised by the management and will remain monitorable.
In fiscal 2024, revenues de-grew by 4.2% to Rs 1,658 crore due to the challenges in the biotech funding causing weak performance in its discovery and development service segments. However, an expected growth recovery by 10-12% is estimated in the current fiscal supported by the gradual recovery in the biotech funding space. Improving demand scenario in the CRDMO industry through the China + 1 sentiments and expected implementation of policies such as Biosecure Act will further pave way to healthier growth prospects in the near-medium term. Operating margins this fiscal is expected to remain at 25-26% as compared to historical levels of 27-28% with lower operating leverage. Going forward, the operating margins are expected to improve to levels of 28-29% through healthier recovery in business. The positive outlook also takes comfort from the changing policy trends seen globally with large pharmaceutical players preferring to outsource their research and development activities to Indian companies’ vis-a-vis Chinese players. That said, continuous and sustained traction in the same coupled with the pace of recovery in global R&D spends will be a key monitorable. |
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 as Aragen Life herein, have the same management, financial linkages and similar business.
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:
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 2024. This division synthesises compounds and does biology studies and the company, with its strong track record, has continually obtained new projects under the division. The outlook on this segment remains favourable given the changing policy trends seen globally with large pharmaceutical players preferring to outsource their research and development activities to Indian companies’ vis-a-vis Chinese players. The company has focus on the Biologics segment (~10%) that is currently catered by the US subsidiary i.e., Aragen Biosciences Inc. Growing demand for large molecules in the pharmaceutical industry given their efficacy and targeted action has led to the company also expanding its presence in the biologics manufacturing in the domestic market through commercialisation of new capacities housed under a wholly owned subsidiary, Aragen Biologics Private Ltd. That said, continuous and sustained traction in the same coupled with the pace of recovery in global R&D spends will be a key monitorable.
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 customers over the past several years. It has long-term relationship 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 share of the top 10 customers to the revenue almost halving in the past 4-5 years and contributing 32% of total revenue in fiscal 2024.
Aragen Life’s financial risk profile is strong, backed by healthy cash accruals and prudent capital structure. Its balance sheet position would further benefit the USD 75 million (Rs 634 crore) of funding infused by the new investor. This shall boost the already strong networth levels to Rs 1,900 crore as on March 31, 2025 from Rs 1,174 crore as on previous fiscal. The company’s financial risk profile to be further comforted from the net debt levels substantially reducing to below Rs 100 crore this fiscal as against Rs 458 crore in the last fiscal. The objective of this investment is to support the envisaged capex plans at ~Rs 550 crore in fiscal 2025 and Rs 400-500 crore annually thereon and limit the dependence on debt over the near to medium term. With this, the financial metrics of net debt to operating profits are expected to improve to 0.02 times in FY25 from 1.08 times in FY24. 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 and other private equity investors on its investment, and Goldman Sachs and other private equity investors may evaluate exit through the planned IPO.
Weaknesses:
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. The company is also exposed to stringent regulatory requirement.
Aragen Life derives over 80% of its revenue from US and Europe exposing it to region-specific regulatory and political developments. This concentrated exposure has led to degrowth in revenue in fiscal 2024 as these key economies underperformed due to economic slowdown. Large portion of the revenue is expected to come from the US market going forward as well, 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. |
Liquidity: Strong Consolidated cash accrual is expected to remain healthy at Rs 300-400 crore that will comfortably cover the yearly debt obligation of ~Rs 80-100 crore and partly fund the capex. Crisil Ratings expects the company to also comfortably be able to meet its NCD repayment of Rs 200 crore in February 2025 will be from the combination of cash generated from operations and the funds from new investment. Utilisation of the fund-based bank limit was ~ 70% (on average) for the 12 months through March 2024. The company also had a healthy liquid surplus of Rs 142 crore, at a consolidated level, as on September 30, 2024. Dividend payout has been high at 25%-30% of the net profit over the past few years and is expected to continue at similar levels. |
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. 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 chemicals 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 4000 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 January 13, 2025, Mr Davinder Brar, his family members and Reddy Investment Trust, together, directly and indirectly held 61.01% shares in the company; 28.55% was held by Goldman Sachs group, 7.59% by Quadria Capital and remaining by the others.
On a standalone level, in the first half of fiscal 2025, the company reported revenue of Rs 795 crore (Rs 707 crore in the corresponding period of fiscal 2024) and net profit of Rs 197 crore (Rs 164 crore). |
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 |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||
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@Fully interchangeable with buyers' credit/bank guarantee
Criteria Details
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