Rating Rationale
January 10, 2018 | Mumbai
Glenmark Pharmaceuticals Limited
Ratings Reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.1850 Crore
Long Term Rating CRISIL AA-/Negative (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Negative/CRISIL A1+' ratings on the bank facilities of Glenmark Pharmaceuticals Ltd (Glenmark).

The ratings continue to reflect the company's increasing presence in the international generics market, particularly the US, strong position in the fast-growing chronic-therapeutic segments in India, and moderate financial risk profile. These strengths are partially offset by stretched working capital cycle, high research and development (R&D) expenditure primarily towards new molecules and differentiated generics, and exposure to regulatory risks and intensifying competition in the US generics market.

Glenmark's business risk profile is supported by its diversified geographical profile with strong position in India and growing presence in the regulated markets. Led by exclusivity of Ezetimibe in the US and new product launches in the US and Europe, the regulated market segment grew by over 20% in the first half of fiscal 2018. However, revenue growth was about 10% because of fall in Latin America (LatAm) and about 10% growth in the domestic market. Decline in LatAm continues as sales in Venezuela ceased from November 2016. Revenue growth is expected to sustain at 12-13% over the medium term, led by continual product launches in the US and steady demand in the domestic market. 

Despite pricing pressure in the regulated markets and moderate revenue growth, operating margin sustained at 21% for the first six months of fiscal 2018. Because of pricing pressure in the US, the operating margin for fiscal 2017, at 23% (led by product exclusivity), was lower than expected. With increasing contribution from high-margin regulated market, the margin is expected to sustain at 20% over the medium term.

Cash flow from exclusive launch in the US was utilised to reduce debt in fiscal 2017. However, correction in leverage is expected to be prolonged. Gearing and ratio of gross debt to earnings before interest, tax, depreciation and amortisation (debt/EBITDA) were at 1 time and 2.3 times, respectively, as on March 31, 2017. The gearing was about 1 time as on September 30, 2017, and is expected at a similar level as on March 31, 2018. High R&D expense and large working capital requirement will continue to constrain financial risk profile.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Glenmark and its 40 subsidiaries. All the entities, together referred to herein as Glenmark, operate in the pharmaceutical segment, and have significant operational linkages and a common management. CRISIL has also amortised goodwill arising from consolidation and intangibles over five years.

Key Rating Drivers & Detailed Description
* Growing presence in the international generics market
Glenmark has a growing presence in the US and other regulated markets, which accounted for 49% of revenue in fiscal 2017 and about 46% in the first six months of fiscal 2018. The US business revenue increased substantially from Rs 723 crore in fiscal 2010 to Rs 2420 crore in fiscal 2016, driven by the company's focus on niche therapeutic segments and products with low competition. Revenue grew 50% to Rs 3701 crore in fiscal 2017 backed by marketing exclusivity period on Ezetimibe from December 2017. The regulated markets revenue, largely led by the US, is expected to grow in mid-teens over the medium term. Glenmark has an established position in the semi-regulated markets, with marketing front ends in Africa, Asia, Commonwealth of Independent States (CIS), LatAm, and Central and Eastern Europe.
* Strong position in the chronic-therapeutic segments
In the domestic formulations market, Glenmark is ranked 13th as per IMS MAT (moving annual total) September 2017. It has 6 brands in the top 300 brands as per IMS MAT September 2017. The domestic market accounted for 26% of revenue in fiscal 2017 and 29% in the first six months of fiscal 2018. Revenue grew 10% in the first six months of fiscal 2018 because of de-stocking by chemists and stockists prior to goods and services tax (GST) implementation. However, the company has a strong position in chronic therapeutic segments such as dermatology, respiratory, diabetes and cardiovascular therapy, and is expected to maintain its growth momentum.
* Moderate financial risk profile
The financial risk profile is moderate, and expected to improve, albeit only gradually. Stretched working capital cycle and sizeable capital expenditure (capex) have meant continued high reliance on debt. The capital structure is, therefore, leveraged compared to other pharmaceutical players. The gearing is expected to improve and remain below 1 time over the medium term. Notwithstanding high R&D expense of about 11%, annual cash accrual is expected at Rs 1300-1500 crore over the medium term, which will be sufficient for term debt repayment and working capital requirement. Glenmark plan moderate annual capex of Rs 700 crore. The financial risk profile is supported by adequate debt protection metrics, with interest coverage ratio of 7.2 times for the first six months of fiscal 2017, and 8.7 times for fiscal 2017.
* Large working capital requirement
Glenmark's working capital cycle is stretched due to a significant presence in emerging economies. Gross current assets (GCA) were high, relative to peers, at 276 days as on March 31, 2017. Though GCAs have reduced from around 300 days as on March 31, 2015, they exceed those of other large Indian pharmaceutical companies. GCAs are expected to improve over the medium term with contribution of semi-regulated market declining to 15% in the first six months of fiscal 2018 from 17% and 22% in fiscals 2017 and 2016, respectively. With lower contribution from these markets, working capital intensity is expected to reduce resulting in lower incremental funding requirement. Other than short-term bank borrowings, large incremental working capital requirement are being met through extended credit from suppliers which are over 240 days (about a third of which are for expenses such as litigation and other administrative expenses).
* High R&D expenditure primarily towards new molecule entities (NMEs) and differentiated generics
R&D expenditure has been higher than that of many peers because of focus on new molecules and differentiated generics. The company has signed out-licensing deals and has received cumulative revenue of more than USD 200 million since 2004 (calendar year). Excluding non-core R&D assets, Glenmark has a pipeline of 10 NMEs and specialty generics/biosimilars as of September 2017. R&D expense has increased in recent years as a few molecules have progressed to an advanced clinical trials stage. Uncertainty regarding revenue visibility and R&D leads to investment risk. However, the company's strategy and focus on out-licensing molecules as it reaches advanced stages, will help maintain R&D expenditure at 11% of sales, over the medium term. Additionally, the company plans to monetize at least one molecule in the near term and utilize the proceeds towards debt reduction and R&D. Any delay will remain a key monitorable.
* Exposure to intensifying competition and regulatory risks
There is intense competition and pricing pressure in regulated generics markets because of increasingly aggressive defence tactics of innovator companies through introduction of authorised generics, especially for blockbuster drugs going off patent. Furthermore, generic players in the regulated markets are adversely affected by severe price erosion because of the commoditised nature of products, along with intense competition and considerable consolidation in distribution channels. Glenmark is also exposed to regulatory risks in both domestic and regulated markets.
Outlook: Negative

CRISIL believes deleveraging of Glenmark's capital structure will be critical for sustenance of its credit risk profile at the current rating category.
Upside scenario
* Sustained decline in gearing and debt/EBITDA to below 1 time and to 2 times, respectively 
* Higher-than-expected cash flow led by revenue growth or improved operating profitability
* Sustained improvement in working capital cycle
Downside scenario
* Higher-than-expected funding requirement for working capital, capex, or acquisitions, leading to gearing and debt/EBITDA remaining above 1.3 times and 2.8 times, respectively
* Lower-than-expected revenue growth and sharp reduction in operating profitability, impacting cash generation

About the Company

Incorporated in 1977, Glenmark was promoted by the late Mr Gracias Anthony Saldanha. His son, Mr Glenn Saldanha, is now the chairman and managing director. The company manufactures pharmaceutical formulations and active pharmaceutical ingredients, which it markets in India and in the international market. It also undertakes R&D on new chemical and biological entities. As on September 30, 2017, the promoters held 46.5% stake in Glenmark, foreign portfolio investors held 33.2%, and the balance was held by the public and others.
For the first six months of fiscal 2018, Glenmark registered revenue of Rs 4619.6 crore and profit after tax of Rs 547.5 crore as against revenue of Rs 4193.5 crore and PAT of Rs 450.37 crore, for the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs Cr. 9096.0 7573.2
Profit After Tax Rs Cr. 1108.8 732.8
PAT Margins % 12.2 9.7
Adjusted Debt/Adjusted Networth Times 1.05 1.10
Interest coverage Times 8.74 8.15

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 Working Capital Demand Loan NA NA Jan-2019 145.0 CRISIL AA-/Negative
NA Cash Credit NA NA NA 325.0 CRISIL AA-/Negative
NA Long-Term Loans* NA NA NA 100.0 CRISIL AA-/Negative
NA Letter of Credit NA NA NA 100.0 CRISIL A1+
NA Bank Guarantee NA NA NA 10.0 CRISIL A1+
NA Short Term Loans NA NA Jan-2019 720.0 CRISIL A1+
NA Proposed Short Term Bank Loan Facility NA NA NA 450.0 CRISIL A1+
*Not availed
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  1740  CRISIL AA-/Negative/ CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL AA-/Negative/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST  110  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 10 CRISIL A1+ Bank Guarantee 10 CRISIL A1+
Cash Credit 325 CRISIL AA-/Negative Cash Credit 325 CRISIL AA-/Negative
Letter of Credit 100 CRISIL A1+ Letter of Credit 100 CRISIL A1+
Long Term Loan 100 CRISIL AA-/Negative Long Term Loan 100 CRISIL AA-/Negative
Proposed Short Term Bank Loan Facility 450 CRISIL A1+ Proposed Short Term Bank Loan Facility 450 CRISIL A1+
Short Term Loan 720 CRISIL A1+ Short Term Loan 720 CRISIL A1+
Working Capital Demand Loan 145 CRISIL AA-/Negative Working Capital Demand Loan 145 CRISIL AA-/Negative
Total 1850 -- Total 1850 --
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

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