Rating Rationale
June 29, 2018 | Mumbai
Cadila Healthcare Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.3577 Crore
Long Term Rating CRISIL AA+/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.125 Crore Non Convertible Debentures CRISIL AA+/Positive (Outlook revised from 'Stable' and rating reaffirmed) 
Rs.250 Crore Short Term Debt (Including Commercial Paper) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the non-convertible debentures and long-term bank facilities of Cadila Healthcare Limited (Cadila Healthcare; part of the Zydus Cadila group) to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL AA+'. The short-term rating is reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflects CRISIL's belief that Cadila Healthcare will achieve a strong and better than peers revenue growth in the regulated markets, will accelerate revenue growth from domestic formulations business to be in line with larger market growth and will continue to strengthen its already healthy financial profile, especially its capital structure.
 
In fiscal 2018, revenues grew over 25% largely led by the US segment; growth in the US market was driven by exclusive opportunity in mesalamine (generic version of Lialda) and limited competition for oseltamivir powder (generic version of Tamiflu). Post successful re-inspection of Moraiya (Ahmedabad) plant in fiscal 2018, abbreviated new drug application (ANDA) approvals surged to 77 ' the company's highest ever annual approvals. It will launch over 50 products in the US in fiscal 2019. CRISIL expects the US segment to benefit from these product launches and contribute towards steady revenue growth expected at about 9-10% over the near to medium term. Regular product launches will aid to off-set the intensifying pricing pressure in the US market.  The business profile will continue to be supported by diversity in revenues through Cadila Healthcare's established presence in semi-regulated markets, animal healthcare formulations and consumer wellness products.
 
The operating margin is expected to remain healthy at about 20% over the medium term while research and development (R&D) expenditure will remain at current level (7-8% of sales). However, sustained momentum of ANDA filings, approvals, and launches in regulated markets will be critical for sustenance of profitability. Steady operating margin coupled with strong US product pipeline, leadership position in domestic business and presence in other diverse segments will strengthen its net cash accruals to over Rs 2000 crore annually from about Rs 1400-1500 crore, earlier.
 
The company has capital expenditure (capex) plans of Rs 800-1000 crore annually which can be funded through strong internal accrual. Backed by healthy cash generation and in the absence of any large debt-funded capex/ acquisition, the gearing is expected to improve to about 0.5 time over the medium term (0.7 time as on March 31, 2018). Debt/EBITDA (earnings before interest, tax, depreciation and amortisation) is also expected to strengthen to about 1.5-1.6 times over the medium term (1.90 time as on March 31, 2018). Besides, the company had liquid surplus of Rs 1,590 crore as of March 31, 2018. However, any large debt-funded acquisition leading to significant increase in gearing will remain a key rating sensitivity factor.
 
The ratings on the debt instruments and bank facilities of Cadila Healthcare continue to reflect the Zydus Cadila group's established position in the branded generics market in India and its growing presence in the international generics markets, particularly the US. The ratings also factor in a healthy financial risk profile, with sound debt protection metrics and adequate gearing. These strengths are partially offset by exposure to risks related to unfavourable regulatory changes, increasing competition, and price erosions in the regulated generics markets.

Analytical Approach

For arriving at its ratings, of Cadila Healthcare, CRISIL has combined the business and financial risk profiles of Cadila Healthcare Ltd and its 35 subsidiaries and step-down subsidiaries (referred as the Zydus Cadila group), as all the entities operate in the pharmaceutical and related space, and have significant operational linkages and a common management. For equal Joint Ventures (JV), CRISIL follows moderate integration approach; specifically, CRISIL factors in the share of profit from the JVs and also share of any incremental investments required by the JVs. CRISIL has amortised goodwill on consolidation, over five years. Both profit after tax and networth are adjusted to that extent.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the branded generics market: The Zydus Cadila group is one of the top five players in India's more than Rs 1,00,000 crore formulations market. The domestic formulation share has remained in the range of 30-40% and was 29% in fiscal 2018. The share declined from 34%, a year ago because of higher revenues from the US segment and moderation in domestic growth.  In India, the group is the market leader in the high-growth lifestyle segments such as gastrointestinal, cardiology, respiratory and gynaecology, which account for over 40% of its domestic formulation sales. As of March 31, 2018, 16 of the Zydus Cadila group's brands rank among the top 300 pharmaceutical brands in India. The segment's growth has remained subdued in the recent past because of high competition in key therapies, personnel related challenges, price revisions and destocking by chemists in anticipation of goods and service tax (GST) implementation. To address these challenges, the group has strengthened its managerial team in marketing and has also shifted the domestic base to Mumbai from Ahmedabad. This is expected to improve its growth momentum over the medium term given the established brands, a large and therapeutic-focused field force, in-licensing agreements, and product launches. It also has established presence in other branded rest of the world markets of Brazil, Mexico and South Africa.
 
* Growing presence in the regulated generics markets: The Zydus Cadila group's business prospects are supported by its growing presence in the regulated generics markets such as the US. In fiscal 2018, the group filed 26 ANDAs, taking its tally of ANDA filings of 330, of which 186 have been approved, as on March 31, 2018. Its healthy pace of filings and approvals in the US reflected in strong ANDA pipeline of over 140 as of March 2018, will strengthen its US business. With the US formulation revenue of Rs 5,835 crore in fiscal 2018, the Zydus Cadila group is one of the top 10 players in US generic markets (Source IMS Moving Annual Total, March 2018). CRISIL expects Cadila Healthcare's US revenues to grow at a healthy pace backed by higher ANDA approvals and launches.
 
* Healthy financial risk profile: For fiscal 2018, the Zydus Cadila group's debt protection metrics were sound, with interest coverage ratio of 33 times. Moreover, it had unencumbered cash and cash equivalents of Rs 1,590 crore as of March 31, 2018. Adjusted gearing and net gearing is at 0.70 and 0.49 time as on March 31, 2018, respectively which has declined from 0.86 and 0.60, respectively from previous year.   CRISIL believes the Zydus Cadila group will improve its financial risk profile supported by healthy internal accrual notwithstanding any moderate sized debt-funded, capex plans.
 
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. While Moraiya was successfully re-inspected and ANDA approvals are received from this site, the group remains exposed to heightened regulatory scrutiny. For instance, in fiscal 2017, revenue posted negative growth in the US market because of lower approvals and launches. Similarly, in the domestic market, drugs under acute as well as chronic therapies were added to the National List of Essential Medicines regularly in 2017. And in fiscal 2018, destocking by chemists in anticipation of GST affected growth (in the domestic formulations segment) during the first quarter. Consequently, the domestic segment posted slower single-digit growth in fiscals 2018 and 2017.
 
* Increasing competition, currency volatility and elongation of working capital cycle: The Zydus Cadila group is also exposed to intense competition in regulated markets, which is marked by aggressive defence tactics by innovator companies through introduction of authorised generics, and the presence of a number of cost-competitive Indian players. Furthermore, generics players in regulated markets are affected by severe price erosions because of the commoditised nature of their products, along with intense competition and considerable government pressures to reduce prices and hence the group will remain susceptible to the same. Because of strong bargaining power of the distributors in the US, the generic players working capital intensity is also high. The Zydus Cadila group's working capital cycle has elongated with its increasing presence in the US. The gross current assets (net of liquid surplus) have increased over the last three years by 40-50 days to about 200 days for fiscal 2018. The company, however, has ample liquidity and high financial flexibility to adjust to the increase in working capital.
Outlook: Positive

CRISIL believes Cadila Healthcare business risk profile will strengthen over the medium term backed by its strong pipeline in the US and diversified revenue profile. The financial risk profile is expected to remain healthy, with above-average networth, adequate gearing, and moderate sized debt-funded capex plans.
 
Upward scenario
* Increased revenue contribution from the US market led by healthy pipeline and product approvals
* Alternatively, significant and sustained increase in revenue from other markets
* Sustenance of profitability and further improvement in financial risk profile
 
Downward scenario
* Decline in operating profitability to below 18%, most likely due to increased competition or regulatory issues
* Capital structure deteriorates significantly because of large, debt-funded capex or acquisitions, and/or material elongation in working capital cycle

About the Company

Cadila Laboratories Ltd (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 Ltd, and the group was named Zydus Cadila. In 2000, Cadila Healthcare got listed on the Bombay Stock Exchange. As on March 31, 2018, the promoters held 74.79% stake in Cadila Healthcare, foreign portfolio investors held 8.70%, and the balance was held by the public and others. Over the years, the company has grown to become one of the top five pharmaceutical companies in India.

Key Financial Indicators
Particulars Unit 2018 2017
Operating income (net of excise) Rs crore 11,905 9,401
Adjusted Profit after tax (PAT)* Rs crore 1,585 1,404
Adjusted PAT margin* % 13.3 14.9
Adjusted debt/adjusted net worth* Times 0.70 0.86
Interest coverage Times 33 45
*Adjusted for goodwill and intangibles amortisation

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs. Cr)
Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 50 CRISIL A1+
NA Letter of Credit NA NA NA 100 CRISIL A1+
NA Cash Credit* NA NA NA 1300 CRISIL AA+/Positive
NA Long Term Loan NA NA 27-Dec-2018 45.64 CRISIL AA+/Positive
NA Long Term Loan NA NA 20-Mar-2020 86.91 CRISIL AA+/Positive
NA Long Term Loan NA NA 17-Jan-2022 195.60 CRISIL AA+/Positive
NA Long Term Loan NA NA 27-Mar-2023 652 CRISIL AA+/Positive
NA Long Term Loan NA NA 10-July 2018 130.40 CRISIL AA+/Positive
NA Long Term Loan NA NA 18-Sep-23 130.62 CRISIL AA+/Positive
NA Long term loan NA NA 01-Mar-22 130.4 CRISIL AA+/Positive
NA Long term loan NA NA 26-Apr-2023 195.60 CRISIL AA+/Positive
NA Proposed Long Term Bank Loan Facility NA NA NA 559.83 CRISIL AA+/Positive
NA Short Term Debt (Including Commercial Paper) NA NA 7-365 days 250.00 CRISIL A1+
NA Non Convertible Debentures ** NA NA NA 75.00 CRISIL AA+/Positive
NA Non Convertible Debentures ** NA NA NA 50.00 CRISIL AA+/Positive
* Fully interchangeable with Working capital demand loan and Packing credit in Foreign Currency
** Yet to be issued;
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
29-06-18 
CRISIL AA+/Positive      13-06-17  CRISIL AA+/Stable  01-11-16  CRISIL AA+/Stable  21-09-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            27-01-17  CRISIL AA+/Stable           
Short Term Debt (Including Commercial Paper)  ST  250.00  CRISIL A1+      13-06-17  CRISIL A1+  01-11-16  CRISIL A1+  21-09-15   CRISIL A1+  CRISIL A1+ 
            27-01-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  3427.00  CRISIL AA+/Positive      13-06-17  CRISIL AA+/Stable  01-11-16  CRISIL AA+/Stable  21-09-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            27-01-17  CRISIL AA+/Stable           
Non Fund-based Bank Facilities  LT/ST  150.00  CRISIL A1+      13-06-17  CRISIL A1+  01-11-16  CRISIL A1+  21-09-15  CRISIL A1+  CRISIL A1+ 
            27-01-17  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 50 CRISIL A1+ Bank Guarantee 50 CRISIL A1+
Cash Credit* 1300 CRISIL AA+/Positive Cash Credit* 1300 CRISIL AA+/Stable
Letter of Credit 100 CRISIL A1+ Letter of Credit 100 CRISIL A1+
Long Term Loan 1567.17 CRISIL AA+/Positive Long Term Loan 1388.8 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 559.83 CRISIL AA+/Positive Proposed Long Term Bank Loan Facility 738.2 CRISIL AA+/Stable
Total 3577 -- Total 3577 --
* Fully interchangeable with Working capital demand loan and Packing credit in Foreign Currency
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 Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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