Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ ratings on the bank facilities of Geltec Private Limited (Geltec; part of the Universal group).

 

For fiscal 2022, the group is estimated to have recorded operating revenues of Rs 250 crore, an increase of 2% compared to fiscal 2021. The operating profitability is estimated at 12.1% in fiscal 2022 compared to 10.9% in fiscal 2021. Overall revenue of the group is expected to improve by 6-8% over the medium term supported by steady demand from the existing reputed customer base like Sanofi, Dr Reddy’s, Abbott, etc. and increasing offtake from its US FDA (United State Food and Drug Administration – audit carried out by Underwriter Laboratories) compliant manufacturing facilities at Sarigam. Operating margins are expected to get moderated mildly owing to input cost pressures but nevertheless remain healthy at 9-11% over the medium term driven by diverse customer base and stable realisations.

 

Geltec shall continue with its greenfield project in Sarigam, Gujarat, towards nutraceuticals capacity at a total estimated cost of around Rs 60 crore to be spread over 2-3 years. The entire capex would be funded from liquid surplus and internal accruals. The cash and cash equivalents, estimated at around Rs 389 crore (including Rs 125 crore in Geltec and Rs. 264 crore in Universal Medicare Pvt Ltd), invested in equity, bonds, debentures, FDs etc., is expected to be maintained in the business and is a key rating driver.

 

The group has consolidated all pharmaceutical operations under Geltec and treasury operations under Universal Medicare private limited (UMPL). Geltec houses contract business with Sanofi India Ltd (Sanofi) and other large pharmaceutical clients like Abbott, Dr Reddy’s Laboratories, Glaxosmithkline Pharma and marketing operations under subsidiaries ' Geltec Pharmacare FZCO, Dubai, Geltec Pte Ltd, Singapore, Geltec Australia Pty Ltd and Geltec Ceylon Pvt Ltd, Sri Lanka. In March 2021, UMPL divested 85% stake in its pharmaceutical business in Dubai (under Geltec Healthcare FZE) for a consideration of Rs 212 crores and balance stake was sold in fiscal 2022. With cash and cash equivalents of about Rs. 389 crores as on March 31, 2022, UMPL will focus on treasury operations and might also look at inorganic growth opportunities in the domestic pharmaceutical market. The Tannan family directly holds more than 95% in both UMPL and Geltec.

 

The rating continues to reflect the Universal group's healthy financial risk profile because of large networth, low gearing and robust liquidity supported by large liquid surplus maintained in UMPL which can be utilized by Geltec in times of need or to fund its capex/acquisition plans keeping reliance on external debt at a minimum. The rating also factors in its established position in the contract manufacturing segment for soft-gel capsules. These strengths are partially offset by modest scale of operations with limited revenue diversity and susceptibility to competition.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of of UMPL and its subsidiaries: Geltec Holdings Pte Ltd, Singapore, Geltec Inc Pte Ltd, Singapore, and Geltec and its subsidiaries namely: Geltec Pharmacare FZCO, Dubai, Geltec Pte Ltd, Singapore, Geltec Australia Pty Ltd (Australia), Geltec Ceylon Pvt Ltd, Sri Lanka. CRISIL has also applied its criteria on assessing homogenous groups. This is because all these entities, together referred to as the Universal group, operate in the same line of business, have cash fungibility and are under a common management.

 

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:

* Established market position: The group has an established presence in the nutraceuticals and soft-gel capsule segments, backed by experience of five decades, and specialisation in soft-gels and related products such as soft-lets and chewables. Manufacturing facilities at Bengaluru and at Sarigam in Gujarat are approved by the regulatory bodies of various countries that the group exports to. Furthermore, revenue from the US markets is expected to improve with the commercialisation of the greenfield plant at Saigram which would be USFDA compliant.

 

* Healthy financial risk profile: The financial risk profile is supported by robust liquidity, as reflected in cash and cash equivalent of around Rs 389 crore (including Rs 125 crore under Geltec) as on March 31, 2022. Net worth is estimated to be comfortable, at Rs 886 crore as on March 31, 2022. Nil external debt leading to strong debt protection metrics with Net cash accrual to adjusted debt ratio estimated at 0.7 time for fiscal 2022. Liquidity is expected to remain healthy.  Cash and equivalents of Rs 300-400 crores is expected to remain over the medium term and is the key rating driver.

 

Weaknesses

* Modest scale of operations with limited diversity: The group used to manufacture formulations till fiscal 2012, after which it sold the brands to Sanofi. Scale remains small and is unlikely to increase significantly over the medium term. However, revenue is expected to grow 6-8% over the medium term with addition of new customers under the contract manufacturing business.

 

* Susceptibility to competition: The domestic formulations market has many organised and unorganised players, especially in mass therapy segments such as anti-infective and gastro-intestinal. Additionally, regulatory policies such as the ban on fixed-dose combinations in February 2016 and the Drug Price Control Order, 2013, have affected growth and profitability of many large Indian and multinational companies.

Liquidity: Strong

Liquidity is strong, backed by robust cash and cash equivalents of Rs 389 crore (including Rs 125 crore under Geltec) as on March 31, 2022 and expected at a similar level of around Rs 300-400 crore over the medium term. Expected cash accruals of Rs 60 crore will be sufficient for capex of Rs 20-25 crore each fiscal and nil debt obligations. Bank lines of Rs 12 crore were unutilised over the past 12 months. Any large acquisition and reduction in cash surplus will remain a rating sensitivity factor.

Outlook Stable

CRISIL Ratings believes the Universal group's business risk profile will be supported by its established customer base. Also, the financial risk profile is expected to remain healthy, backed by a strong investment portfolio.  

Rating Sensitivity factors

Upward factors

• Significant growth in scale of operations while maintaining healthy margins resulting in net cash accruals of over Rs. 100 crore.
• Continued healthy financial risk profile, while maintaining sufficient liquidity.

 

Downward factors

• Sustained decline in revenue with fall in operating profitability materially impacting cash generation; net cash accruals falling below 45-50 crore per annum.
• Large, debt-funded capex, acquisition or stretch in working capital cycle adversely impacting capital structure and debt protection metrics.
• Material decline in liquidity position or a change in investment policy, leading to increased exposure to high-risk instruments.

About the Group

The Universal group commenced operations by marketing cod liver oil of UK-based Seven Seas in India. Subsequently, the group introduced its own products to build a portfolio of drugs in the nutraceutical and lifestyle segments. Since the sale of its brand portfolio to Sanofi in fiscal 2012, the group undertakes contract manufacturing for pharmaceutical companies.

 

It specialises in manufacturing soft-gel capsules, which are soft-gelatin shells encapsulating medicines in liquid or semi-liquid form, and producing nutraceuticals for Sanofi other large pharmaceutical clients like Abbott, Dr Reddy’s Laboratories, Glaxosmithkline Pharma.

 

UMPL, incorporated in 1971, has treasury operations and used to operate the Dubai plant for increasing the sales and exports to other Middle East countries, which has now been sold to Abu Dhabi based Yas Holdings. In March 2021, UMPL divested 85% stake in Geltec FZE to Yas Holdings for a consideration of Rs 212 crore, the company would now have only treasury operations. 

 

Incorporated in 1994, Geltec is a contract manufacturer of pharmaceuticals products and specialises in manufacturing soft-gel capsules.

Key Financial Indicators

Particulars*	Unit	2021	2020
Revenue	Rs crore	245	185
Adjusted profit after tax (PAT)	Rs crore	58	-8
Adjusted PAT margin	%	24.1	-4.4
Adjusted debt/adjusted networth	Times	0.08	0.17
Adjusted interest coverage	Times	160.2	4.67

*Consolidated financials for UMPL and Geltec

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	12.0	NA	CRISIL A+/Stable

*Inclusive of sublimit of working capital demand loan, export packing credit to the extent of Rs 5 crore each