Rating Rationale

Strengths
* Strong market position in select therapies in the domestic market: Eris has an established market position in select therapies in highly fragmented and competitive domestic pharmaceutical market. This is reflected in its strong growth and ranking in the respective segments. The company is largely present in cardiovascular (CVS), anti-diabetics, vitamins, gastroenterology, anti-infectives and gynaecology. Its strategy of focusing on lifestyle related therapies, target geographies of metro and tier-1 cities and a doctor-patient engagement model has enabled it to be amongst the fastest growing top 25 companies in the chronic category. In just over a decade since incorporation, Eris is ranked among the top 10 in CVS and anti-diabetics segments, as per IMS Moving Average Total (MAT), March 2018. Ranking of CVS has improved with the acquisition of domestic brand business from Strides Shasun in December 2017. Eris' prescription base has increased by nearly 80%, year-on-year to 85,593 as per IMS MAT, February 2018.

* Healthy operating profitability: Eris' focus on lifestyle related segments that require specialists or super-specialists intervention, the patient-doctor engagement model and brands with strong market share and high sales channel productivity led to healthy profitability of over 35%. The company has consistently improved its operating margin since inception and is over 35% for fiscals 2018 and 2017. CRISIL believes that operating margin is likely to be marginally lower over the near term following acquisition of domestic brand segment from Strides Shasun, however, it will remain healthy over the medium term.

* Healthy financial risk profile: The financial risk profile is characterised by its strong capital structure, healthy debt-protection metrics and ample liquidity. Gearing is 0.45 time as on March 31, 2018 and its debt to earnings before interest, tax, depreciation (EBITDA) ratio is 1.16 times for fiscal 2018. Eris follows a conservative gearing philosophy and had minimal external borrowings until recently. The present debt was contracted for acquisition of domestic brand segment from Strides Shasun. Eris has made multiple smaller acquisitions in the past, which were funded using its own cash flows. Given the healthy profitability and no major debt-funded capital expenditure (capex), Eris is expected to maintain its healthy financial risk profile over the medium term. Any large acquisition and its funding pattern, will remain a monitorable. Eris' liquidity profile is supported by positive cash flow from operations and its low incremental working capital funding requirements. The company had healthy liquid surplus of Rs 376 crore as on March 31, 2018. CRISIL believes that the company will also sustain its ample liquidity over the medium term.

Weakness
* Exposure to risks related to therapeutic area concentration: Eris is exposed to product and therapeutic concentration as it primarily derives revenues from CVS and anti-diabetic therapies which account for about 60% of revenues for nine months ended December 31, 2017 and over 60% in fiscal 2017. Moreover, the company's top ten mother brands account for over 70% of revenues as against average of about 40% for its larger and more diversified peers. CRISIL believes that the addition of CNS segment following Strides Shasun transaction will reduce the revenue concentration somewhat. However, the share of top 10 brands will remain over 60% and that of CVS and anti-diabetes will be high at over 50% over the medium term. CRISIL believes that any adverse impact of high competition or regulatory changes such as price control orders, on Eris' market position and profitability will be a key monitorable. CRISIL also believes that the revenue concentration constrains Eris' overall market position in the Indian pharmaceutical market with an overall rank of only 26 as on December 31, 2017(IMS MAT), even as it ranks among the top 15 or top 20 companies in select therapeutic areas.

* Risks related to integration of large acquisition of domestic brand business from Strides Shasun: Eris' acquisition of Strides Shasun's domestic branded segment is its largest till date. Eris' ability to integrate the business with its existing operations, extract the synergies identified and to expand the sales channel productivity to the levels of Eris' existing portfolio will be a key monitorable over the medium term. To improve profitability of acquired operations, Eris plans to leverage its existing sales force to further grow the business and has only taken on board, a part of the erstwhile domestic sales force at Strides Shasun. Eris also plans to shift manufacturing for these CNS products to its own facility in Guwahati (Assam) over near to medium term. These initiatives are expected to improve operating profitability of the acquired CNS business. CRISIL believes that any material delays or challenges in integration or extracting synergies from the CNS business may impact Eris' operating profitability and growth in its cash flow from operations.

* Exposure to high competition and increasing regulatory risks in pharmaceutical industry: Eris is exposed to high competition in the highly fragmented domestic formulations market where the market share of the largest 10 players is below 45%. High competition constrains ability of players operating in the Indian market to substantially increase scale of operations or to gain significant market share. Eris is also susceptible to adverse regulatory changes in the Indian pharmaceutical market. Additions to lists under National List of Essential Medicines, as per Drug Price Control Order (DPCO) impacts product pricing and hence profitability of players, even as the extent of impact across companies differs. Eris' present portfolio under DPCO coverage is small at about 10%. Besides DPCO, Government interventions such as ban on certain fixed dose combinations in March 2016 or proposal to make generic prescriptions mandatory have potential to change the way the industry operates with uneven implications for different players. Any such major changes in regulations and their impact on respective credit profiles will be an ongoing monitorable.