Rating Rationale
December 29, 2017 | Mumbai
J B Chemicals and Pharmaceuticals Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.225 Crore
Long Term Rating CRISIL AA/Stable (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/Stable/CRISIL A1+' ratings on the bank facilities of J B Chemicals and Pharmaceuticals Limited (JB Chemicals; a part of the JB Chemicals group).
 
The ratings continue to reflect the JB Chemicals group's healthy financial risk profile, marked by strong liquidity, and an established position in the pharmaceutical industry. These strengths are partially offset by susceptibility to (foreign exchange) forex risk in the semi-regulated markets and intense competition. The business risk profile is also susceptible to regulatory changes in domestic and rest-of-world markets.
 
The group has healthy financial risk profile because of adjusted gearing of below 0.1 time both, as on March 31, 2017, and as on September 30, 2017; it is expected to remain stable over the medium term. Liquidity is strong with healthy unencumbered liquid surplus of about Rs 430 crore as on September 30, 2017. With dividend pay-out expected to be moderate, the liquid surplus is expected to remain stable over the medium term.
 
The group is expected to sustain revenue growth at 9-10% led by its diversified revenue segment. In the first half of fiscal 2018, JB Chemicals' standalone revenue grew about 5% to Rs 616 crore largely because of muted performance in the first quarter. Domestic revenue declined in the first quarter of fiscal 2018, in line with industry, because of destocking by retailers in anticipation of goods and services tax implementation. However, it recovered with growth of over 25% in the second quarter. For the first half of fiscal 2018, export revenue remained flat at about Rs 258 crore. Bulk drug sales grew over 20% in the first half of fiscal 2018 led by strong demand.
 
The group is focusing on increasing its research and development expenditure (presently about 2% of sales) to increase its share of regulated markets over the medium term. However, in semi-regulated markets, it remains susceptible to risks related to fluctuations in forex as it covers its exposure through forward contracts to the extent of 50-75%. The group also remains exposed to any regulatory change in domestic and international markets.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of JB Chemicals and all its wholly owned subsidiaries Unique Pharmaceuticals Laboratories FZE (Dubai), OOO Unique Pharmaceutical Laboratories (Russia) and its 95.24% subsidiary Biotech Laboratories (Pty) Ltd (South Africa). This is because these entities collectively referred to herein as the JB Chemicals group, have common management and the same business interests. In fiscal 2017, JB Chemicals' subsidiary Unique Pharmaceutical Laboratories LLC (Ukraine) was wound-up as there were no major operations. CRISIL has amortised goodwill on consolidation and intangibles over five years - profit after tax and networth are adjusted to that extent.

Key Rating Drivers & Detailed Description
Strengths
* Healthy financial risk profile
Financial risk profile is healthy, driven by adjusted gearing of less than 0.1 time as on September 30, 2017; gearing is expected to remain stable over the medium term. With only working capital borrowing and healthy profitability, debt-protection metrics are robust. Net cash accrual to total debt and interest coverage ratios were 4.9 times and 53 times, respectively, in fiscal 2017 and are expected to remain robust over the medium term. The group has capital expenditure plans of Rs 30-40 crore annually over the medium term and these will be funded with internal accrual. Liquidity is healthy because of surplus liquid funds of about Rs 430 crore as on September 30, 2017, and is expected to remain stable over the medium term.
 
* Established position in pharmaceuticals industry
The group has an established market position in pharmaceutical industry with diversified revenue profile. It derived about 46% revenue from the domestic market and rest from international segment in fiscal 2017. It ranks 35th in the domestic market (IMS Moving Annual Total, March 2017). Its three brands ' Rantac (anti-peptic ulcerant), Cilacar (calcium channel blocker) and Metrogyl (amoebicides) feature among top 300 brands (IMS MAT March 2017), these brands also account for over 75% of domestic revenue.  Within the international segment, the group has presence in regulated markets and semi-regulated markets including Russia and countries of Commonwealth of Independent States.
 
Weaknesses
* Exposure to forex risk in semi-regulated markets and intense competition
The group mainly caters to therapeutic segments, including gastro, cardiovascular, antibiotic, and pain management. Furthermore, high concentration in the relatively slow-growing acute therapeutic segments (70% of domestic sales) exposes the group to pricing pressures, given the intense competition in this mature market segment, and high proportion of products under price control.
 
* Susceptibility to regulatory changes
The group will remain vulnerable to regulatory changes in the domestic and international markets. Addition to lists under Drug Price Control Order impacts product pricing and thereby, profitability of players, though the extent of impact may differ. Furthermore, regulatory risks faced by the group are manifested by increasing scrutiny and inspections by authorities such as the US Food and Drugs Administration and Therapeutic Goods Administration, Australia. For instance, in January 2016, JB Chemicals received a notification, along with several other companies, from National Green Tribunal to shut down the active pharmaceutical ingredients (APIs) plant in Panoli (Gujarat). Presently, there is a stay order by the Supreme Court and the matter is subjudice.
Outlook: Stable

CRISIL believes the group's growth over the medium term will be supported by an established market position in India. The group is expected to gradually increase its market share in the regulated markets, thereby diversifying the revenue profile. The outlook may be revised to 'Positive' if there is considerable diversification of the revenue profile and significant improvement in operating performance, with healthy capital structure. Conversely, the outlook may be revised to 'Negative' if revenue growth or profitability is modest. Weakening of liquidity or a change in investment policy leading to increase in exposure to high-risk investments, will also be a rating sensitivity factor.

About the Company

JB Chemicals was originally set up as JB Mody Chemicals and Pharmaceuticals Ltd in 1976 by Mr. J B Mody and his family for manufacturing APIs and formulations; the name of this company was changed in 1985. The promoter group owns 55.85% of the company, as on September 30, 2017. JB Chemicals has manufacturing units in Ankleshwar and Panoli (both in Gujarat) and Daman (Union Territory of Daman and Diu). It manufactures a wide range of pharmaceutical formulations specialties, radio-diagnostics, APIs and intermediates.

For the first six months of fiscal 2018, standalone PAT was Rs 72.1 crore on operating revenue of Rs 633.8 crore, against PAT of Rs 95 crore on operating revenue of Rs 615.9 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 2017 2016
Revenue Rs crore 1343.6 1196.0
Adjusted PAT* Rs crore 172.8 149.9
Adjusted PAT margin* % 12.9 12.5
Adjusted debt/adjusted networth Times 0.03 0.16
Interest coverage Times 52.8 23.4
*Adjusted for goodwill and intangibles amortisation

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 Cash Credit* NA NA NA 120 CRISIL AA/Stable
NA Letter of Credit# NA NA NA 11 CRISIL A1+
NA Letter of Credit@ NA NA NA 9 CRISIL A1+
NA Proposed fund based bank facility NA NA NA 55 CRISIL AA/Stable
NA Proposed non fund based bank facility NA NA NA 30 CRISIL A1+
*Cash credit is interchangeable with export packing credit, foreign bills purchase, and working capital demand loan facilities
@Letter of credit is interchangeable with bank guarantee, cash credit, export packing credit, foreign bill purchase and working capital demand loan facilities
# Letter of credit is interchangeable with bank guarantee
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  175  CRISIL AA/Stable    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL AA/Stable 
Non Fund-based Bank Facilities  LT/ST  50  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
Cash Credit* 120 CRISIL AA/Stable Cash Credit* 120 CRISIL AA/Stable
Letter of Credit# 11 CRISIL A1+ Letter of Credit# 11 CRISIL A1+
Letter of Credit@ 9 CRISIL A1+ Letter of Credit@ 9 CRISIL A1+
Proposed Fund-Based Bank Limits 55 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 85 CRISIL AA/Stable
Proposed Non Fund based limits 30 CRISIL A1+ -- 0 --
Total 225 -- Total 225 --
*Cash credit is interchangeable with export packing credit, foreign bills purchase, and working capital demand loan facilities
@Letter of credit is interchangeable with bank guarantee, cash credit, export packing credit, foreign bill purchase and working capital demand loan facilities
# Letter of credit is interchangeable with bank guarantee
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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