Rating Rationale
June 29, 2019 | Mumbai
Jubilant Life Sciences Limited
Ratings Reaffirmed
 
Rating Action
Rs.350 Crore Non Convertible Debentures CRISIL AA/Stable (Reaffirmed)
Rs.400 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilitie
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the non-convertible debenture and commercial paper of Jubilant Life Sciences Limited (JLL).

The ratings continue to reflect the company's strong business risk profile due to diversified revenue, healthy profitability driven by focus on regulated markets with niche products in the pharmaceuticals segment, and economies of scale and integrated operations in the life science ingredients (LSI) segment. This is also supported by an adequate financial risk profile with improving gearing and debt protection metrics. These strengths are partially offset by product concentration in some businesses, and exposure to regulatory risks and competitive pressures.
 
Strong business risk profile is expected to be sustained over the medium term, backed by diversified revenue and healthy profitability in the pharmaceuticals and LSI segments; ramp-up of new launches and existing products are expected to ensure steady revenue growth of around 10% over the medium term. Revenue grew by 21% in fiscal 2019, backed by strong growth of 33% in the pharmaceutical segment, driven by the full-year benefit of the acquisition of Triad Isotopes Inc's (Triad) radiopharmacy business (acquired in September 2017). Through Triad, JLL has presence in front-end radiopharmaceutical distribution in the US. Growth from new products and execution of existing contracts in radiopharmaceuticals, and steady growth in allergy therapy products and the contract manufacturing segment are expected to aid the company's specialised pharmaceuticals business. Volume growth from new product launches and entering new markets will aid growth in the generics business. This will partly offset pricing pressure in the generics segment, given the supply chain consolidation in the US. Operating profitability (operating profit before interest, tax, depreciation, and amortisation) of the pharmaceutical segment is expected to sustain at about 26% over the medium term. However, resolution of the US Food and Drug Administration (US FDA) warning letters will be a key rating sensitivity factor.
 
The LSI segment grew at a moderate 7% and operating profitability declined to 13% in fiscal 2019 from 19% in the previous fiscal. This was because of pricing pressure in the nutrition segment as well as price fluctuations in life science chemicals segment. Market conditions with respect to pricing have stabilised and the company's operating profitability is expected to sustain at 19-20% over the medium term on the back of the high-margin pharmaceutical segment.
 
Financial risk profile has benefited from its improving cash generation and prudent capital spending, leading to healthy key credit metrics. Balance sheet, which was moderately leveraged during fiscals 2016 and 2017, has improved as term debt is repaid, while networth benefits from strong accretions. Gearing weakened marginally in fiscal 2019 because of issuance of bonds to refinance an existing loan and the excess funds are parked as cash and cash equivalents. Adjusted gearing was about 1.6 times and, on net debt basis, it was about 1.1 times as on March 31, 2019; while ratio of net debt to operating EBITDA (earnings before interest, tax, depreciation, and amortisation) was about 2 times (2.2 times for fiscal 2018).

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of JLL and its subsidiaries, together referred to as JLL, as these companies have considerable operational and financial linkages. Furthermore, CRISIL has amortised the goodwill arising out of acquisitions over ten years from the date of the respective acquisition.

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:
* Strong business risk profile backed by diversified revenue: The company has pursued significant diversification of businesses even while building onto its existing knowledge of chemistry. The pharmaceuticals segment is expected to benefit from established market position of Triad in the US. About 58% of revenue was derived from the pharmaceuticals segment while LSI contributed 39%, in fiscal 2019. These two segments further comprise multiple diversified sub-segments. Revenue is geographically diversified across North America, India and rest of the world markets.
 
* Focus on regulated markets with niche products support profitability: Operating margin in the pharmaceuticals segment is backed by focus on regulated markets, while having a healthy portfolio of niche products. For instance, in the radiopharmaceuticals business, speciality product portfolio with limited competition presently drives profitability.
 
* Economies of scale and integrated operations underpin performance in the LSI segment: Business risk profile in the LSI segment is backed by high operating efficiencies. Economies of scale derived from global scale of capacities, high level of integrated manufacturing, deep chemistry knowledge, and continuous improvement leading to cost efficiencies have supported the LSI segment's profitability to an extent, against price volatility in inputs as well as any shift in demand between different products in the value chain.
 
* Adequate financial risk profile: Strong cash-generating ability, prudent capital spend, and tight control over working capital benefit financial risk profile. Adjusted gearing improved to 1.6 times as on March 31, 2019, from over 2 times as on March 31, 2017, and is expected to improve further. This is likely to lead to sustained improvement in credit metrics. Any large, debt-funded capital expenditure (capex) or acquisition will remain a key monitorable.
 
Weaknesses:
* Product concentration in some businesses: In the radiopharmaceuticals business, significant revenue is derived from a single product. However, this is mitigated as products have high entry barrier, thereby limiting competition. The company is also diversifying through niche product launches in the radiopharmaceuticals business. In the LSI business, due to capacities of global scale, revenue contribution is high from ethyl acetate, acetic anhydride, pyridine, and Vitamin B3.
 
* Exposure to regulatory risks and intense competition: The regulatory scrutiny that JLL is exposed to is manifested in its generic facility in Roorkie, Uttarakhand, receiving a warning letter from the US FDA. Official action was indicated for its Nanjangud, Karnataka, facility as well by the US FDA in fiscal 2019. The company has earlier resolved warning letters in a timely manner for its US facilities, and subsequent inspections have been successfully completed across other sites; however, the company remains exposed to timely resolution of Roorkie and Nanjangud facility.
 
In the LSI business, JLL faced anti-dumping duty for its pyridine exports to China in 2015. The company has since entered into other geographies, thereby derisking pyridine exposure in China. Any adverse impact of such regulatory actions on revenue and profitability will remain a key rating sensitivity factor. Furthermore, the solid dosage business is intensely competitive because of aggressive defence tactics by innovator companies through introduction of authorised generics, and healthcare cost containment measures by the US government. Also, solid dosage formulations players in the US and Europe are vulnerable to pricing pressure on account of increase in the number of players and consolidation among distributors.
Liquidity

Liquidity is adequate. Moderately high capex of about Rs 600-700 crore annually is expected to be prudently funded with low reliance on debt. Cash accrual is expected to be over Rs 1,000-1,200 crore against term debt repayment of Rs 100 crore in fiscal 2020. Cash and cash equivalents are Rs 1,370 crore. Bank limit is moderately utilised at an average of 60% for 12 months through March 2019.

Outlook: Stable

CRISIL believes JLL's business risk profile will continue to benefit from revenue diversity, strong market position, large scale, and healthy profitability over the medium term. Financial risk profile will benefit from strong cash generation, prudent capex spend, and debt repayment, leading to continued improvement in credit metrics over the medium term.
 
Upside scenario:
* Stronger-than-anticipated business performance, led by new product launches
* Faster-than-anticipated debt reduction and improvement in credit metrics ' for instance, net debt to EBITDA of 1 time by the end of fiscal 2021 - led by superior cash generation or significant equity raising
 
Downside scenario:
* Regulatory issues or pricing pressures leading to substantially low profitability, also impacting cash generation; and delay in expected improvement in credit metrics
* Any large, debt-funded capex or acquisition increasing leverage ' for instance, net debt/EBITDA of over 2.5 times

About the Company

JLL is an integrated global pharmaceutical and life sciences company engaged in pharmaceuticals, LSI, and drug discovery solutions. The pharmaceuticals segment, through its wholly owned subsidiary, Jubilant Pharma Ltd, manufactures APIs, solid dosage formulations, radiopharmaceuticals, and allergy therapy products; and contract-manufactures sterile and non-sterile products through six US FDA-approved manufacturing facilities in India, the US, and Canada. It also has a network of over 50 radiopharmacies in the US. The LSI segment is engaged in speciality intermediates, nutritional products, and life science chemicals through five manufacturing facilities in India. The drug discovery solutions segment provides proprietary in-house innovation and collaborative research and partnership for out-licensing through three research centres in India and the US. As on March 31, 2019, promoters held 50.68% stake in JLL, foreign portfolio investors held 26.65%, and the balance was held by the public and others.
 
JLL is part of the Jubilant Bhartia group that has interests across pharmaceuticals, LSI, performance polymers, food products and services, automobiles, consulting in aerospace, and oilfield services. The group is promoted by Mr Shyam Sunder Bhartia and Mr Hari Bhartia.

Key Financial Indicators
Particulars Unit 2019 2018
Operating income (net of excise) Rs crore 9,112 7,518
Profit after tax (PAT)* Rs crore 523 490
PAT margin % 5.7 6.5
Adjusted debt/adjusted networth* Times 1.6 1.4
Interest coverage Times 8.1 5.5
*Adjusting for goodwill 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 Commercial Paper Programme NA NA 7 ' 365 days 400.00 CRISIL A1+
INE700A07055 Non-convertible Debentures 05-Sep-18 8.95 05-Sep-20 100.00 CRISIL AA/Stable
INE700A07063 Non-convertible Debentures 05-Sep-18 9.10 05-Sep-21 100.00 CRISIL AA/Stable
INE700A07071 Non-convertible Debentures 05-Sep-18 9.26 05-Sep-22 150.00 CRISIL AA/Stable
 
of Instrument(s)
  Company Name
1 Jubilant  Pharma  Limited
2 Draximage  Limited,  Cyprus
3 Draximage  Limited,  Ireland
4 Jubilant  Draximage  (USA)  Inc.
5 Jubilant  Draximage  Inc.
6 6963196 Canada Inc. (merged into 6981364 Canada Inc.  w.e.f.  1  April  2018)
7 6981364  Canada   Inc.
8 Draximage  (UK)  Limited
9 Jubilant  Pharma  Holdings  Inc.
10 Jubilant  Clinsys  Inc.
11 Cadista Holdings  Inc.
12 Jubilant  Cadista  Pharmaceuticals  Inc.
13 Jubilant Life Sciences International Pte.  Limited
14 HSI,   Holdings  Inc.
15 Jubilant  HollisterStier  LLC
16 Jubilant  Life  Sciences  (Shanghai)  Limited
17 Jubilant  Pharma  NV
18 Jubilant  Pharmaceuticals  NV
19 PSI  Supply  NV
20 Jubilant  Life  Sciences  (USA)  Inc.
21 Jubilant  Life  Sciences (BVI)  Limited
22 Jubilant  Biosys (BVI)  Limited
23 Jubilant Biosys (Singapore) Pte.  Limited
24 Jubilant  Biosys  Limited
25 Jubilant  Discovery  Services  LLC
26 Jubilant Drug Development Pte.  Limited
27 Jubilant Chemsys  Limited
28 Jubilant  Clinsys  Limited
29 Jubilant  Infrastructure  Limited
30 Jubilant  First  Trust  Healthcare  Limited
31 Jubilant  Pharma  Trading  Inc. (merged  into  Jubilant Pharma Holdings Inc. w.e.f 14 December  2018)
32 Jubilant Innovation Pte.  Limited
33 Jubilant  Draximage  Limited
34 Jubilant  Innovation  (India)  Limited
35 Jubilant  Innovation  (USA)  Inc.
36 Jubilant  HollisterStier  Inc.
37 Draxis  Pharma  LLC
38 Drug Discovery and Development  Solutions  Limited
39 TrialStat Solutions Inc. (formerly  known  as  Jubilant Drug Discovery & Development Services  Inc.)
40 Jubilant  HollisterStier  General  Partnership
41 Draximage  General  Partnership
42 Vanthys  Pharmaceutical  Development  Private  Limited
43 Jubilant  Generics  Limited
44 Jubilant  Life  Sciences  NV
45 Jubilant  Pharma  Australia  Pty  Limited
46 Jubilant  Draximage  Radiopharmacies  Inc.
47 Jubilant Pharma SA PTY.  Ltd, South Africa  (incorporated  w.e.f.  14  February  2019)
48 Jubilant Therapeutics India Ltd (incorporated w.e.f.  20  March  2019)
49 Jubilant Therapeutics Inc.  (incorporated w.e.f.  19  February  2019)
50 Jubilant Business Services Limited  (incorporated  w.e.f.  28  March  2019)
51 Jubilant Episcribe LLC, USA  (incorporated  w.e.f.  28  March  2019)
52 Jubilant Prodel, LLC, USA  (incorporated  w.e.f.  28  March  2019)
53 Jubilant Epiapd LLC, USA  (incorporated  w.e.f.  28  March  2019)
54 Jubilant Epicore LLC, USA  (incorporated  w.e.f.  28  March  2019)
55 Jubilant  Employee  Welfare  Trust
Above companies are fully 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  400.00  CRISIL A1+      25-06-18  CRISIL A1+  28-04-17  CRISIL A1+    --  -- 
            30-04-18  CRISIL A1+           
Non Convertible Debentures  LT  350.00
29-06-19 
CRISIL AA/Stable      25-06-18  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 Consolidation
CRISILs Criteria for rating short term debt
Understanding CRISILs Ratings and Rating Scales

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