| Cadila Healthcare Limited | ||||||
| Ratings 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 reaffirmed its ratings on the bank facilities and debt programme of Cadila Healthcare Limited (Cadila Healthcare; a part of the Zydus Cadila group) at 'CRISIL AA+/Stable/CRISIL A1+'. |
| Analytical Approach |
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For arriving at the ratings of Cadila Healthcare, CRISIL has combined the business and financial risk profiles of Cadila Healthcare Ltd, and its 42 subsidiaries and step-down subsidiaries (referred as the Zydus Cadila group), as all entities operate in the pharmaceutical and related space, with significant operational linkages, under a common management. For equal joint ventures (JVs), CRISIL follows a moderate integration approach; specifically, CRISIL factors in share of profit from JVs, and share of any incremental investments required by JVs. CRISIL has amortised goodwill consolidated on earlier acquisitions over five years and on HIPL's acquisition over 10 years. Both profit after tax (PAT) and networth are adjusted to that extent. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position: The Zydus Cadila group is one of the top five players in the domestic formulations market, valued at over Rs 120,000 crore in fiscal 2019. The group is the market leader in the high-growth lifestyle segments such as gastrointestinal, cardiology, respiratory and gynaecology, which account for about 40% of its domestic formulation sales. As on September 30, 2019, 11 of the group's brands feature among the country's top 300 pharmaceutical brands. In fiscal 2019, the group has strengthened its marketing team giving more thrust on market strategies such as growth in the categories, integration of channel partners, supply chain and procurement to improve revenues and cost synergies. This is reflected in better growth momentum in the first half of fiscal 2020 and expected to sustain over the medium term, backed by its established brands, large and therapeutic-focused field force, in-licensing agreements, and product launches. It also has established presence in rest of the world markets of Brazil, Mexico and South Africa. Rest-of-the world segment (including Latin America) grew by about 6% in fiscal 2019 and 31% in the first half of fiscal 2020. * Growing presence in the regulated generics markets: The group's business prospects are supported by its growing presence in regulated generics markets like the US. The group has now 272 approvals and has filed over 360 abbreviated new drug application (ANDAs), as on September 30, 2019. Healthy pace of filings and approvals in the US, also reflected in the strong ANDA pipeline of over 100 as of September 2019, will strengthen the US business. With formulation revenue of Rs 6,280 crore in fiscal 2019, the group is one of the top 10 players in the US generic market (Source: IQVIA National Prescription Audit generic Moving Average Total March 2019). The warning letter on Moraiya will constrain the growth to an extent in the near term, as 8-10 ANDA approvals may be impacted until the remediation is complete; resolution remains a key monitorable. * Healthy financial risk profile: Financial risk profile is marked by adequate capital structure and debt protection metrics. With HIPL's acquisition, adjusted gearing and net gearing(net of cash) stood at 0.79 time and 0.71 time, respectively, as on March 31, 2019 and is expected at 0.60 ' 0.70 time over the medium term. The interest coverage ratio will remain healthy, despite the debt-funded acquisition; however, the benefits from acquisition of HIPL are expected to accrue only over the medium term - in the interim, debt/EBITDA ratio may peak at 2.9 times by end of fiscal 2020 and correct to 2.5 times over the medium term. Any material debt-funded acquisition will be a key rating monitorable. Weaknesses: * Exposure to risks related to unfavourable regulatory changes: The Zydus Cadila group remains exposed to regulatory risks, both in domestic and international markets, particularly the US. For instance, in May 2019, the Moraiya plant received 14 observations during audit by the US Food and Drug Administration (FDA) and the inspection was classified as Official Action Indicated (OAI). The OAI status was escalated to a warning letter in October 2019. Though the company has prior experience of remediation of warning letter as in fiscal 2017, timely remediation of the outstanding warning letter will be critical for the future US growth momentum. The ongoing litigation by the anti-trust division of US Department of Justice on industry generic players regarding price-collusion allegations remains a monitorable. Further, any price-control measures of the government in the branded segment may weaken the domestic formulation growth. * Exposure to intense competition, volatility in foreign exchange rates and stretch in the working capital cycle: The Zydus Cadila group faces intense competition in regulated markets, where innovator companies engage in aggressive defence tactics by launching authorised generics, and there are several cost-competitive Indian players present. Furthermore, generics players in regulated markets are affected by severe price erosions, given the commoditised nature of products, along with intense competition and considerable government pressure to lower prices. Strong bargaining power of distributors in the US, leads to large working capital requirement. The group's gross current assets (net of liquid surplus) have increased by 40-50 days over the past three fiscals, to around 227 days as on March 31, 2019. Ample liquidity and high financial flexibility is expected to meet the incremental working capital requirement. |
| Liquidity Strong |
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Liquidity is strong: cash accrual is expected to be over Rs 1700 crore annually in fiscals 2020 and 2021, and to be sufficient to meet moderate term debt obligation about Rs 700 crore and 1000 crore, respectively. Sizeable cash and cash equivalents (including investments in mutual funds) of nearly Rs 1,300 crore as on September 30, 2019, also support liquidity. Besides, the company (standalone) has fund-based bank limits which remain moderately utilized at about 40%. The cash accruals will be sufficient to meet the capex requirements of Rs 750-1000 crore annually. |
| Outlook: Stable |
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CRISIL believes Cadila Healthcare will maintain a diversified revenue profile across geographies and healthy cash accrual over the medium term. The financial risk profile is expected to remain healthy, with moderate-sized, debt-funded capital expenditure (capex) plans and gradually improving credit metrics. |
| Rating Sensitivity factors |
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Upward Factors: * Healthy sustained compound annual growth rate of 13-15% with increased revenue contribution from the US market following the remediation of warning letter issued by US FDA or better-than-expected contribution from other manufacturing units/markets * Sustenance of healthy operating margin ' at 18-19%, supporting adequate cash generation * Gross debt/EBIDTA of below 2.00 times from about 3.00 times in the first half of fiscal 2020 Downward Factors: * Decline in profitability to below 15-16%, due to delay in closure of warning letters by US FDA or increased competition or weaker-than-expected improvement in HIPL's operations * Slower-than-anticipated recovery in credit metrics; gross debt/EBITDA increasing to over 3.6-3.8 times owing to lower cash generation, sizeable, debt-funded acquisitions, capital spending, or a sizeable stretch in the working capital cycle |
| About the Company |
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Cadila Laboratories was founded in 1952 by Mr Ramanbhai Patel and Mr Indravadan Modi. Cadila Healthcare came into existence in 1995 following the split of Cadila Laboratories, with the Modi family's share being moved into a new company called Cadila Pharmaceuticals Ltd. The division that was managed by Mr Ramanbhai Patel's son, Mr Pankaj Patel, was renamed Cadila Healthcare, and the group was named the Zydus Cadila group. In 2000, Cadila Healthcare got listed on the Bombay Stock Exchange. Over the years, the company has grown to become one of the top five pharmaceutical companies in India. It also has growing presence in the regulated markets, particularly the US and is one of the top 10 players in the US generic market. Other segments include emerging markets formulations, consumer wellness, animal healthcare and bulk drugs. |
| Key Financial Indicators | ||||||||||||||||||||||||
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| *Adjusted for goodwill and intangibles amortisation |
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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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Subsidiary Company with 31st December as its reporting date. |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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