Rating Rationale
July 31, 2021 | Mumbai
Harman Finochem Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.400 Crore
Long Term RatingCRISIL A/Stable (Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/Stable/CRISIL A1+' ratings on the bank facilities of Harman Finochem Limited (HFL).

 

The ratings continue to reflect HFL's established market position in the active pharmaceutical ingredients (API) industry marked by extensive experience of the promoters, dominant position in key products and diversified customer profile, healthy operating efficiencies, and strong financial risk profile. These strengths are partially offset by working capital intensive operations, product concentration in revenue and intense competition and exposure to risks related to the ongoing capital expenditure (capex).

Analytical Approach

Unsecured loans from promoters have been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position and extensive experience of the promoters in the API industry: The promoters have extensive experience of over three decades in the API industry. Their experience has helped HFL to establish itself as a large, organised player in bulk drugs industry and establish strong relationships with customers and suppliers. Over the years, it has developed more than 40 products catering to different therapeutic segments such as anesthetic, anti-diabetic, anti-gout, anti-chlonergic and anti-xiolytic among others. HFL has a dominant position in key product segments, driven by large, dedicated product capacities for allopurinol and metformin. It is one of the largest manufacturers of allopurinol. It has also diversified into contract manufacturing for formulations.

 

  • Diversified customer base: Serving wide geographies have helped expand sales to customers across 35 countries. Its reputed clientele includes Cadila Pharmaceuticals Ltd., Intas Pharmaceuticals Ltd., Dr. Reddy's Laboratories Ltd. and Novartis Pharmaceuticals with top 10 customers contributed around 41% to total revenues in fiscal 2021. Repeat orders from customers and steady increase in capacities, has led to increase in revenue to Rs 785 crore in fiscal 2021 from Rs 375 crore in fiscal 2018 and is expected to grow at a steady rate of minimum 10% over the medium term aided by strong demand for its key products as well as capacity additions.

 

  • Healthy operating efficiencies: Operating margin has been healthy in the range of 34-37% during the past two fiscals through 2021, with HFL benefitting from economies of scale with large capacities and continuous research and development for improving processes. It has received certification of suitability from EQDM, USFDA, Korean FDA, Health Canada and WHO-GMP. Return on capital employed has also been healthy at around 27-28% over the past two fiscals ended 2021.

 

  • Strong financial risk profile: HFL's capital structure is strong with networth of Rs 850 crore as on March 31, 2021. Gearing and total outside liabilities to adjusted networth (TOLANW) ratio were also comfortable at 0.11 time and 0.25 time, respectively, as on March 31, 2021 (0.04 time and 0.23 time, respectively, a year before) on account of controlled reliance on external funds. Debt protection measures are adequate with interest coverage and net cash accrual to adjusted debt ratios of 69.61 times and 2.5 times, respectively, in fiscal 2021 backed by healthy profitability. Despite proposed debt funded capital expenditure, financial risk profile is expected to remain strong over the medium term backed by strong accretion to reserves.

 

Weaknesses:

  • Working capital-intensive operations: Gross current assets (GCAs) were at around 145-180 days over the three fiscals ended March 31, 2021.  HFL has a receivables cycle of around 3-3.5 months and maintains inventory of 2-3 months, necessitated by the lead time on imports and a diversified product basket. This leads to large working capital requirement which is met by credit from suppliers of 80-100 days, fund support from promoters and internal accruals, leading to low dependence on working capital borrowings. With increase in revenues, the incremental working capital requirements will remain high and hence its management will remain a key monitorable.

 

  • Product concentration in revenue profile and intense competition: Despite having multiple products, HFL derives 70% of the total revenue from sale of allopurinol and metformin hydrochloride. Hence, it is exposed to high product concentration risk. Any slowdown in demand for these products, due to introduction of substitutes can adversely affect the topline of HFL. The bulk drugs industry is highly competitive because of the presence of numerous domestic, as well as global players, which exerts pricing pressure on individual entities. Diversification of product basket while maintaining profitability will remain key monitorable.

 

  • Exposure to risks related to the ongoing capex: HFL is undertaking greenfield project at Amravati, Maharashtra, for setting up a facility for formulations and capacity expansions of existing products. The estimated cost of capex is around Rs. 500 crore, to be partly debt-funded and is expected to be completed in phases over the next 3-4 years. Timely completion of the project with no major cost overruns, and subsequent increase in revenue will be a key monitorable.

Liquidity: Strong

HFL enjoys strong liquidity driven by expected cash accruals of more than Rs. 200 crore per annum in fiscal 2022 and 2023, and had cash and cash equivalents of Rs. 125 crore as on March 31, 2021. Its fund-based limits of Rs. 110 crore has largely remained unutilised over the 12 months through June 2021. The company has long-term debt obligation of Rs. 15 crore in fiscals 2022 and Rs. 32 crore in fiscal 2023 along with capex of around Rs 500 crore planned for next 3-4 years. With gearing of 0.11 time, HFL has sufficient headroom to raise additional debt to meet its capex requirement. Its unutilised bank lines are expected to be sufficient to meet incremental working capital requirements. Unsecured loans from promoters also provide liquidity support.

Outlook: Stable

CRISIL Ratings believes that HFL will continue to benefit from its established market position, extensive experience of its promoters, and established relationships with clients and strong financial risk profile.

Rating Sensitivity factors

Upward Factors

* Sustained improvement in revenue and operating profitability above 30%, with timely implementation of capex leading to high cash accrual

* Strengthening of the financial risk profile, backed by efficient working capital management (GCA below 150 days)

 

Downward factors

* Any unanticipated, debt-funded capex or stretch in working capital cycle, leading to increase in gearing above 1 time

* Any substantial decline in revenue or operating profitability, leading to low cash accruals.

About the Company

HFL, incorporated in 1983, manufactures more than 40 APls and intermediates used in various therapeutic segments such as anesthetic, anti-diabetic, anti-gout, anti-chlonergic, and anti-xiolytic among others. It has also started marking formulations from in-house APIs recently.

 

HFL has two manufacturing facilities, located in Aurangabad (Maharashtra) and Vapi (Gujarat) and plans to have additional facility in Amravati (Maharashtra).  It also has R&D facilities in Navi Mumbai as well as at its manufacturing locations.

 

The company is promoted and managed by Mr Bhupinder Singh Manhas, Ms Inderjeet Kaur, Mr Harpreet Singh Minhas and Dr Gurpreet Singh Minhas.

Key Financial Indicators

As on/for the period ended March 31

Unit

2021*

2020

Operating income

Rs.Crore

784.9

640.0

Reported profit after tax (PAT)

Rs.Crore

178.4

122.0

PAT margin

%

22.7

19.1

Adjusted debt/adjusted networth

Times

0.11

0.04

Interest coverage

Times

69.61

123.58

*Provisional numbers

Status of non cooperation with previous CRA:

HFL has not cooperated with INFOMERICS Valuation and Rating Private Limited which has published its ratings as an issuer not co-operating vide release dated 12-Feb-2021. The reason provided by INFOMERICS Valuation and Rating Private Limited was non-furnishing of information for monitoring of ratings.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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

Complexity levels

Issue size
(Rs.Crore)

Rating assigned
with outlook

NA

Letter of Credit

NA

NA

NA

NA

10

CRISIL A1

NA

Proposed Term Loan

NA

NA

NA

NA

150

CRISIL A/Stable

NA

Term Loan

NA

NA

Jun-25

NA

102

CRISIL A/Stable

NA

Working Capital Facility

NA

NA

NA

NA

138

CRISIL A/Stable

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 390.0 CRISIL A/Stable   -- 30-04-20 CRISIL A/Stable   --   -- --
Non-Fund Based Facilities ST 10.0 CRISIL A1   -- 30-04-20 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
Letter of Credit 10 CRISIL A1 Letter of Credit 10 CRISIL A1
Proposed Term Loan 150 CRISIL A/Stable Proposed Term Loan 280 CRISIL A/Stable
Term Loan 102 CRISIL A/Stable Working Capital Facility 110 CRISIL A/Stable
Working Capital Facility 138 CRISIL A/Stable - - -
Total 400 - Total 400 -
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
The Rating Process
Understanding CRISILs Ratings and Rating Scales
CRISILs Bank Loan Ratings

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