Rating Rationale
August 29, 2019 | Mumbai
IPCA Laboratories Limited
Rating Reaffirmed
 
Rating Action
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 reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of IPCA Laboratories Limited (Ipca).
 
Healthy revenue growth of 11-12% annually is likely to sustain over the medium term, supported by a strong growth of 14-15% in the domestic market. Benefits from the company's leadership position in segments such as rheumatoid arthritis and orthopaedic therapies led to a 16% year-on-year growth in the domestic market in fiscal 2019. Export growth momentum is expected to sustain (11% in fiscal 2019) on the back of stable growth in the international market over the medium term and commencement of tender business from The Global Fund, Geneva, following clearance of regulatory issues. Furthermore, operating profitability is expected to sustain at 17-18%. Profitability improved to nearly 19% in fiscal 2019 driven by better capacity utilisation and minimal remediation costs of plants. By March 2018 end, Ipca had incurred a major portion of cost towards remediation of regulatory issues raised by the US Food and Drug Administration (US FDA) at three of its plants, and has invited US FDA for re-inspection. Better-than-expected contribution from The Global Fund anti-malarial business and timely resolution of import alert issued by the US FDA can provide additional uptick to revenue growth and profitability and hence will be key monitorables. 
 
Financial risk profile remains strong. Gearing was comfortable at 0.15 time as on March 31, 2019 (0.23 time as on March 31, 2018). Debt protection metrics for fiscal 2019 were also healthy, reflected in interest coverage and net cash accrual to total debt ratios of around 37 times and 1.3 times, respectively. Absence of any large, debt-funded capital expenditure (capex) and steady accrual are likely to keep financial risk profile steady over the medium term.
 
The rating continues to reflect Ipca's established position in the domestic formulations segment, presence in diverse therapeutic segments, integrated operations, and strong financial risk profile because of a robust capital structure and healthy debt protection metrics. These 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 rating, CRISIL has combined the business and financial risk profiles of Ipca and its subsidiaries because of their high operational and financial linkages. For joint ventures (JV) and associates, CRISIL follows a moderate integration approach; specifically, CRISIL factors in any incremental investments required.

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 position in domestic formulations, with presence in diverse segments: Ipca is among India's top 20 pharmaceutical companies. Product portfolio has been expanding in the fast-growing therapeutic segments, and includes cardio vascular (CVS), anti-diabetic, and dermatology drugs.
 
* Robust financial risk profile is backed by a substantial networth of Rs 3,138 crore as on March 31, 2019, and healthy capital structure. Debt protection metrics were also comfortable for fiscal 2019. Financial risk profile is expected to sustain over the medium term in the absence of any sizeable debt-funded capex.
 
Weaknesses:
* Working capital-intensive operations: Gross current assets were 220 days as on March 31, 2019, 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, and anti-malarial segments, which are intensely competitive. Of late, the domestic pharmaceutical sector has also been subject to increased regulatory scrutiny, adding to challenges for players. However, this is partially offset by the company's leadership position in key brands such as Zerodol, hydroxychloroquine Sulfate, and Lariago. Besides, the company is required to comply with regulations issued by authorities in various countries, given its international presence.
 
Liquidity: Strong
Liquidity is strong, with cash accrual of Rs 600 crore in fiscal 2019. Over the medium term, accrual is expected to be Rs 700-800 crore and will be more than adequate to meet debt obligation of Rs 155 crore and Rs 114 crore in fiscals 2020 and 2021, respectively; and capex and working capital requirements. Financial flexibility is enhanced by low bank limit utilisation of 29% on average over the 12 months ended June 2019, healthy cash and equivalents of Rs 370 crore, and comfortable gearing of 0.15 time as on March 31, 2019. Liquidity will remain adequate over the medium term.

Rating sensitivity factors
Downside factors:
* Decline in profitability to below 13%, most likely due to decline in revenue or adverse product-mix
* Large debt-funded capex or acquisition or stretch in working capital cycle adversely affecting capital structure or debt protection metrics
About the Company

Set up in 1949, Ipca manufactures formulations, active pharmaceutical ingredients (APIs), and drug intermediates. Product range includes pain management, cardiovascular medicines, anti-malarial, anti-emetic, antibiotic, analgesic, and anti-diabetic; and formulations for cough and cold therapy, skin problems, and problems with the central nervous system. The company is also a leading supplier of APIs such as atenolol (anti-hypertensive), chloroquine and artemisinin derivatives (anti-malarial), furosemide (diuretic), and pyrantel salts (anthelmintic).
 
As on June 30, 2019, promoters held 46.07% stake in Ipca, foreign portfolio investors held 15.6%, and the balance was held by the public and others.
 
For the first quarter of fiscal 2020, operating income and profit after tax (PAT) were Rs 1,078 crore and Rs 129 crore, respectively, against Rs 875 crore and Rs 68 crore, respectively, for the corresponding quarter in the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Operating income Rs crore 3,781 3299
Adjusted profit after tax (PAT) Rs crore 442 239
Adjusted PAT margin % 11.7 7.3
Adjusted debt/adjusted networth Times 0.15 0.23
Adjusted interest coverage Times 36.48 18.72

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 50.00 CRISIL A1+
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation
Subsidiaries
IPCA Pharma Nigeria Limited, Nigeria Full
IPCA Pharmaceuticals Limited, SA. de CV, Mexico Full
IPCA Laboratories (U.K.) Limited, UK Full
IPCA Pharmaceuticals Inc. USA Full
IPCA Pharma (Australia) Pty Limited, Australia Full
Tonira Exports Limited, India Full
Step-down subsidiaries
Onyx Scientific Limited, UK Full
IPCA Pharma (NZ) Pty Limited, New Zealand Full
Pisgah Labs Inc.,USA Full
Bayshore Pharmaceuticals LLC, USA Full
Joint Venture
Avik Pharmaceuticals Limited, India Moderately consolidated
Associates
Trophic Wellness Private Limited, India Moderately consolidated
Krebs Biochemicals & Industries Limited, India Moderately consolidated
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A1+      03-08-18  CRISIL A1+  23-11-17  CRISIL A1+    --  -- 
Non Convertible Debentures  LT    --    --  03-08-18  Withdrawal  23-11-17  CRISIL AA-/Stable  28-06-16  CRISIL AA-/Stable  CRISIL AA/Negative 
                30-06-17  CRISIL AA-/Stable       
Short Term Debt  ST              30-06-17  CRISIL A1+  28-06-16  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST    --    --    --  30-06-17  Withdrawal  28-06-16  CRISIL AA-/Stable  CRISIL AA/Negative 
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 Consolidation
CRISILs Criteria for rating short term debt

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