Rating Rationale
August 03, 2018 | Mumbai
IPCA Laboratories Limited
Rating outlook revised to 'Positive' and NCD withdrawn ; CP reaffirmed
 
Rating Action
Rs.5 Crore Non Convertible Debentures CRISIL AA-/Positive (Outlook revised from 'Stable' and Rating withdrawn)
Rs.50 Crore 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 (NCDs) of IPCA Laboratories Limited (Ipca) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA-'. CRISIL has then withdrawn the rating on these NCDs at the company's request and on receipt of no-dues certificate. This is in line with CRISIL's policy on withdrawal of its rating on NCDs. The rating on commercial paper programme has been reaffirmed at 'CRISIL A1+'.

The outlook revision reflects CRISIL's belief that Ipca's revenue growth will be healthy at 11-12% over the medium term supported by a strong growth of 14-15% (5% in fiscal 2018; 14% in 9 months post GST blip in the first quarter of fiscal 2018) in the domestic market segment. Exports are expected to grow at 6-7% (flattish in fiscal 2018) backed by stable growth in the international markets over the medium term. Further, CRISIL expects the operating profitability will see a steady improvement to 15-16% over the medium term driven by better capacity utilization and minimal remediation costs expected going forward. Ipca has incurred major portion of cost towards remediation of regulatory issues raised by the US Food and Drug Administration (US FDA) at three of its plants, by the end of March 2018 and has invited US FDA for re-inspection of all of them. Better-than-expected contribution from global fund anti- malarial business and timely resolution of import alert issued by US FDA can provide additional uptick to revenue growth and profitability and hence will be a key rating sensitivity factor. 

The outlook revision also factors in the sustenance of strong financial profile marked by healthy capital structure and debt protection metrics. Gearing remained comfortable at 0.23 time as on March 31, 2018 (0.29 time as on March 31, 2017). Debt protection metrics for fiscal 2018 were also healthy, reflected in the interest coverage and net cash accrual to total debt (NCATD) ratios of around 18.7 times and 0.64 time, respectively. Absence of any large debt-funded capital expenditure (capex) and steady accrual are likely to keep the financial risk profile strong over the medium term.

The ratings continue to reflect an established position in the domestic formulations segment, presence in diverse therapeutic segments, and integrated operations.The ratings also factor in a strong financial risk profile because of a robust capital structure and healthy debt protection metrics. These rating strengths are partially offset by working capital-intensive operations, exposure to intensifying competition in the pharmaceutical industry and susceptibility of performance to regulatory changes in the domestic and international markets.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Ipca and its subsidiaries because of their high operational and financial linkages.

Key Rating Drivers & Detailed Description
Strengths
* Established position in domestic formulations with presence in diverse segments: Ipca has an established position in the domestic formulations market and is among India's leading pharmaceutical companies; Ipca is ranked 20th as per IMS health as of March 2018. Product portfolio has been expanding in the fast-growing therapeutic segments, such as cardio vascular (CVS), anti-diabetic, and dermatology.

* Robust financial risk profile: Ipca's financial risk profile remains healthy, backed by a substantial networth of Rs.2689 crore and robust capital structure, along with healthy debt protection metrics in fiscal 2018. The financial risk profile is expected to be sustained over the medium term in absence of any sizeable debt-funded capex plans.

Weaknesses
* Working capital intensive operations: Ipca's operations have high working capital intensity. Gross current assets were large at around 207 days as on March 31, 2018, on account of large inventory and export receivables. The company operates in multiple geographies and has a wide product portfolio; hence, it is required to maintain substantial inventory to ensure adequate supply. Given a continuously expanding product portfolio, operations are expected to remain working capital intensive over the medium term.

* Exposure to intense competition and regulatory changes: Around 70% of revenue is derived from sales of drugs in the CVS, anti-diabetic, nonsteroidal anti-inflammatory drugs (NSAIDs), and anti-malarial segments. These segments are intensely competitive because of the presence of a large number of players. Of late, the domestic pharmaceutical sector has also been subject to increased regulatory scrutiny, adding to challenges for players. Besides, the company is required to comply with regulations issued by authorities in various countries, given its international presence.

Outlook: Positive
CRISIL believes that Ipca's business risk profile is likely to improve over the medium term led by mid double-digit growth in the domestic segment, gradual diversification of revenue profile, and improvement in operating margin over the medium term.

Upside scenario
* Higher-than-expected revenue growth and diversity driven most likely by higher contribution from global fund business and quick resolution of import alert issued by US FDA
* Improvement in operating margin to 16-17% and RoCE to 11-12% over the medium term
* Sustenance of healthy financial risk profile.

Downside scenario
* Decline in profitability to below 13%, most likely due to delay in lifting of import alert by US FDA or decline in revenue
* Large debt-funded capex programme or any large acquisition or stretch in working capital cycle adversely affecting capital structure or debt protection metrics.
About the Company

Ipca, set up in 1949, manufactures formulations, active pharmaceutical ingredients (APIs), and drug intermediates. Its product range includes anti-malarial, pain management, anti-emetic, antibiotic, analgesic, anti-diabetic, and cardiovascular medicines; and formulations for cough and cold therapy, skin problems, and problems with the central nervous system. The company is one of India's largest suppliers of bulk drugs, such as atenolol (anti-hypertensive), chloroquine and artemisinin derivatives (anti-malarial), furosemide (diuretic), and pyrantel salts (anthelmintic).

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs.Crore 3299 3211
Adjusted Profit after tax (PAT) Rs.Crore 239 195
Adjusted PAT margin % 7.3 6.1
Adjusted debt/adjusted net worth Times 0.23 0.29
Adjusted interest coverage Times 18.72 17.76

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 Commercial Paper NA NA 7 to 365 Days 50 CRISIL A1+
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
Commercial Paper  ST  50.00  CRISIL A1+      23-11-17  CRISIL A1+    --    --  -- 
Non Convertible Debentures  LT  0.00
31-07-18 		 Withdrawn      23-11-17  CRISIL AA-/Stable  28-06-16  CRISIL AA-/Stable  21-09-15  CRISIL AA/Negative  CRISIL AA/Stable 
            30-06-17  CRISIL AA-/Stable           
Short Term Debt  ST          30-06-17  CRISIL A1+  28-06-16  CRISIL A1+  21-09-15  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST    --    --  30-06-17  Withdrawal  28-06-16  CRISIL AA-/Stable  21-09-15  CRISIL AA/Negative  CRISIL AA/Stable 
All amounts are in Rs.Cr.
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 Criteria for rating short term debt

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