CRISIL has assigned its 'CRISIL AA' rating to the non-convertible debentures (NCD) of Jubilant Lifesciences Ltd (JLL) and placed it on 'Rating Watch with Developing Implication'. The rating on long-term bank facilities continue on 'Rating watch with Developing  Implications' and rating on  commercial paper programme has been reaffirmed at 'CRISIL A1+'.
 
On October 31, 2019, CRISIL had placed its ratings on 'watch with developing implications' following the announcement of the board's approval for reorganising the businesses of JLL and demerger of the Life Science Ingredients (LSI) business.
 
As per the transaction, the LSI business (including related subsidiaries, accounting for 39% of JLL's revenue and about 24% of earnings before interest, depreciation, taxes and amortization [EBITDA] in fiscal 2019) will be transferred to another entity, which will house specialty intermediates, nutritional products and life science chemicals through five manufacturing facilities in India. The pharmaceutical entity, under JLL (post demerger), will have three businesses: 1) Pharmaceutical business through Jubilant Pharma Ltd Singapore (JPL) which is into radiopharmaceuticals, allergy therapy products, active pharmaceuticals ingredients, and solid dosage formulations and contract manufacturing, 2)  Drug Discovery Services business through Jubilant Biosys Ltd & Jubilant Chemsys Ltd and 3) Proprietary drug discovery business through Jubilant Therapeutics, which is into small molecule therapies in oncology and auto-immune disorders.
 
The management also plans amalgamation of promoter shareholding companies into JLL with an objective to simplify the holding structure of the promoters with no change in ownership percentage and number of shares of the promoters in JLL.  With this merger of the holding companies, no incremental liabilities will be added in JLL. The demerger is structured such that existing shareholders will have similar shareholding in each entity. The demerger is subject to necessary statutory and regulatory approvals from Stock Exchanges, National Company Law Tribunal (NCLT), minority shareholders, lenders, and creditors. As on date, the approvals from exchanges have been received and filing with NCLT has been done on February 28, 2020. NCLT will further hold a creditor and shareholding meeting, conduct hearing and then submit the report to Securities Exchange Board of India for its final approval. The process is likely to get over by August 2020. As informed by the management, the objective of the demerger is to unlock shareholder value and enable focused investments for each entity. The management aims to create distinct business undertakings which will enable greater operational efficiency and a dedicated management structure.
 
CRISIL notes that the credit risk profile of JLL post demerger will continue to be supported by the pharmaceuticals business that currently accounts for 58% of consolidated revenue and 75% of EBITDA in fiscal 2019, given the healthy portfolio of products and presence in niche segments such as radiopharmaceuticals, allergy therapy products and contract manufacturing for global pharmaceutical companies. CRISIL is in discussion with JLL management to better understand the division of assets and liabilities (including debt), and will remove the ratings from watch, and announce its final action once key regulatory approvals are obtained.
 
On the other hand, the business risk profile of the demerged entity that will house the LSI business (revenues of Rs 2,357 crore and operating profit of Rs. 313 crore for the nine month ended for fiscal 2020) will be moderate compared with JLL combined, due to lower operating profitability given the commoditised nature of business. Nevertheless, the financial risk profile of JLL (post demerger) and LSI business (under new entity) will continue to remain healthy on due to strong cash-generating ability, prudent capital spend, and tight control over working capital. Post demerger, the long term bank loan facilities and NCDs are likely to be under the new LSI entity, whose overall credit quality may not vary by more than a notch, from that of the consolidated entity.
 
CRISIL also notes the temporary supply disruption of key starting material for the industry due to Novel Coronavirus (COVID-19) outbreak in China since January 2020. However, the supplies have resumed towards end of March 2020. Further, JLL maintains inventory of 2-3 months (about 80 days as on September 30, 2019) and hence has adequate inventory. Further, the Company subsidiary, Jubilant Generics Limited's Nanjangud plant is temporarily shut since last week of March 2020, as some employees were tested positive for COVID-19. Approval to resume operations of the Nanjangud plant has been received, and Jubilant Generics is taking steps to start production and allied operations in consultation with the authorities. The plant accounts for about 8% of JLL's revenue. However, prolonged supply disruption or operation of its plants at lower capacity utilisation due to limited labour mobility, will remain a key monitorable.
 
The ratings reflect JLL'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 LSI segment. The ratings also factor in the company's adequate financial risk profile, supported by 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.

For arriving at its rating, 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 10 years from the date of the respective acquisition.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.
 

Liquidity is supported by healthy annual cash generating ability (over Rs.1000 crore) and moderate utilisation of bank lines (~73% for 12 months through April 2020). Capital expenditure (capex) is expected to be about Rs 500-600 crore annually and is expected to be majorly funded from internal accruals. Term debt obligations is about Rs 14 crore in fiscal 2021 and about Rs 1,540 crore in fiscal 2022 for both business segments. Repayment of bonds in fiscal 2022 is expected to be met with internal accruals and surplus liquidity; however, the company may refinance part of its obligations. Cash and cash equivalents including other bank balance were at Rs 687 crore as on December 31, 2019.
 
Rating sensitivity factors
Upward factors:
* Stronger than anticipated business performance, led by new product launches and sustained improvement in the EBITDA margins of the pharmaceutical business
* Faster than anticipated debt reduction and improvement in credit metrics ' for instance net debt to EBITDA ratio improving to 1 time - led by substantial cash generation or lower-than-expected debt
 
Downward factors:
* Regulatory issues or pricing pressures leading to substantially low profitability and  impacting cash generation
* Demerger or large, debt-funded capex or acquisition resulting in higher leverage ' for instance, net debt/EBITDA ratio of over 2.5 times

JLL is an integrated global pharmaceutical and life sciences company engaged in pharmaceuticals, LSI, and drug discovery solutions. In the pharmaceuticals segment, JLL manufactures active pharmaceutical ingredients, solid dosage formulations, radiopharmaceuticals, and allergy therapy products through its wholly owned subsidiary, JPL, and undertakes contract manufacturing of 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, 2020, promoters held 50.68% stake in JLL, and the balance was held by the public and others.
 
JLL is a 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.
 
For fiscal 2020, JLL reported operating income of Rs 9,154 crore and profit after tax (PAT) of Rs 898 crore as against operating income of Rs 9,112 crore and a PAT of Rs 577 crore for fiscal 2019.

Any other information: Not applicable