Rating Rationale
October 07, 2020 | Mumbai
Kopran Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.98.5 Crore
Long Term Rating CRISIL BBB/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A3+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long term bank facilities of Kopran Limited (Kopran; part of the Kopran group) to 'Positive' from 'Stable' while reaffirming its 'CRISIL BBB' rating. Short term ratings has been reaffirmed at 'CRISIL A3+'.
 
The revision in outlook reflects improvement in group's business risk profile expected over the medium term. Improved demand from export market, addition of new geographies and new products under development, should result in higher revenue and profitability over the medium term. Further, the manufacturing operations were not significantly impacted by lockdown and other measures taken by central and state governments to contain the spread of the Covid-19, since the company operates in the essential segment. Group's revenue improved by 43.6% in first quarter of fiscal 2021 (year-on-year) and net profits grew by 238%; sustenance of revenue growth and profitability shall remain key monitorable.
 
The ratings continue to reflect the extensive experience of promoters in the pharmaceutical industry, and the above-average financial risk profile despite debt funded capex in the past. These strengths are partially offset by the working capital-intensive operations, and susceptibility to volatile input prices.

Analytical Approach

For arriving at its ratings, CRISIL continues to fully consolidate the business and financial risk profiles of Kopran and its wholly-owned subsidiaries, Kopran Research Laboratories Ltd (KRLL; rated 'CRISIL BBB/Stable/CRISIL A3+'), Kopran Lifesciences Ltd, and Kopran (HK) Ltd, Hong Kong, and Kopran (UK) Ltd, collectively referred to as the Kopran group, as they are in the similar line of business and have significant operational and financial linkages

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

Key Rating Drivers & Detailed Description
Strengths
* Extensive experience of the promoters: The four-decade-long experience of the promoters in the pharmaceutical industry, their strong relationships with key suppliers and customers, will continue to support the business risk profile. The group has been working on obtaining certifications and approvals for exports to developed markets and received USFDA approval for their API unit in fiscal 2020. Benefits from the extensive experience of the promoters should continue, as demonstrated by several product launches under the formulations segment. Scale up in operations at the API manufacturing unit of Maxheal Pharmaceutical, acquired recently, should bring additional revenue over the medium term further strengthening the business risk profile.
 
* Above-average financial risk profile: Financial risk profile marked by a healthy networth and  total outside liabilities to adjusted networth ratio (TOLANW) of Rs 181.1 crore and 1.0 times, respectively, as on March 31, 2020, vis-a-vis Rs 161.1 crore and 1.1 times, respectively, as on March 31, 2019. Despite debt funded capex of around Rs.30-35 crore over the medium term, TOLANW ratio is likely to sustain at around one times in the medium term. Debt protection metrics were healthy, with the interest coverage and net cash accrual to adjusted debt ratios at 5.3 times and 0.3 time, respectively, in fiscal 2020, and likely to sustain above 7 times and 0.4 times, respectively, in the medium term.
 
Weaknesses
* Working capital-intensive operations: Gross current assets were high at 221 days, driven by receivables and inventory of 122 and 103 days respectively, as on March 31, 2020. GCAs are expected to be remain high at 200-210 days. Debtor profile is marked by significant revenue derived from South Africa and other African countries, however, bulk of the sales are backed by letter of credit mitigating credit risk associated with exposure.
 
* Volatility in operating margin: Operating margin has ranged between 11.9% and 14.9% over the four fiscals through March 2020, owing to volatility in raw material prices. Though the group has the ability to pass on price fluctuations to customers, it is with a lag, and any sharp volatility impacts profitability. Operating margins are expected to improve over the medium term on the back of better fixed cost absorption and higher contribution from regulated markets where the margins are higher.
Liquidity Adequate

Net cash accrual was Rs.30.6 crores in fiscal 2020, more than sufficient to cover the maturing debt of Rs 10.37crore in fiscal 2020 (including repayment of inter corporate deposits). Net cash accruals to maturing debt ratio is expected to be over 4 times over the next 2 fiscals. Bank limit utilisation was moderate, averaged at 59% over the 6 months through August 2020. Planned capex of around Rs 30-35 crore in medium term, will be funded through 50-60% debt and internal accruals. Gearing of 0.62 times as on March 31, 2020, and support from promoter group also support financial flexibility  

Outlook: Positive

CRISIL believes that the business risk profile is likely to improve over the medium term, supported by improved demand form existing clients and higher contribution from new products and regulated markets
 
Rating sensitivity factor:
Upward factors:
* Sustained growth in revenue and operating margins backed by higher contribution from regulated markets and high margin products strengthens net cash accruals to over Rs.45 crores
* Improvement in working capital cycle and better financial risk profile with improved debt protection metrics
 
Downward factors:
* Lower than expected revenue growth and operating margins below 14.5% constrains net cash accruals
* Stretch in working capital cycle or higher than expected debt funded capex/ acquisition or deterioration in debt protection metrics weakens the financial risk profile

About the Group

Kopran was incorporated in 1958, promoted by the Mumbai-based Somani family. The company, which is a part of the Parijat group, is managed by Mr Surendra Somani. It manufactures pharmaceutical formulations such as antibiotics, anti-malarial, analgesics, and cardiovascular and bulk drugs at its facilities in Mahad and Khopoli in Maharashtra.  In fiscal 2015, the bulk drugs division was transferred to KRLL through a slump sale. Kopran Lifesciences Ltd and Kopran (HK) Ltd, Hong Kong are small entities and nearly defunct.

Key Financial Indicators
As on / for the period ended March 31   2020 2019
Operating income Rs crore 359.4 358.1
Profit after tax Rs crore 21.0 24.0
PAT margins % 5.8 6.7
Adjusted Debt/Adjusted Net worth Times 0.6 0.8
Interest coverage Times 5.3 5.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)
Maturity Date Issue Size
(Rs. Cr)
Complexity level Rating Assigned  with Outlook
NA Bank Guarantee NA NA NA 0.75 NA CRISIL A3+
NA Cash Credit NA NA NA 15 NA CRISIL BBB/Positive
NA Letter of Credit NA NA NA 15 NA CRISIL A3+
NA Loan Equivalent Risk Limits NA NA NA 5.25 NA CRISIL A3+
NA Proposed Long Term Bank Loan Facility NA NA NA 62.5 NA CRISIL BBB/Positive

Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Kopran Limited Full Common management and engaged in the same line of business
Kopran Research Laboratories Ltd Full Common management and engaged in the same line of business
Kopran Lifesciences Ltd Full Common management and engaged in the same line of business
Kopran (HK) Ltd Full Common management and engaged in the same line of business
Kopran (UK) Ltd Full Common management and engaged in the same line of business
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  82.75  CRISIL BBB/Positive/ CRISIL A3+  12-03-20  CRISIL BBB/Stable/ CRISIL A3+  07-01-19  CRISIL BBB/Stable/ CRISIL A3+  24-05-18  CRISIL BBB/Stable/ CRISIL A3+      CRISIL BBB-/Stable/ CRISIL A3 
                14-02-18  CRISIL BBB/Stable/ CRISIL A3+       
Non Fund-based Bank Facilities  LT/ST  15.75  CRISIL A3+  12-03-20  CRISIL A3+  07-01-19  CRISIL A3+  24-05-18  CRISIL A3+      CRISIL A3 
                14-02-18  CRISIL A3+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee .75 CRISIL A3+ Bank Guarantee .75 CRISIL A3+
Cash Credit 15 CRISIL BBB/Positive Cash Credit 15 CRISIL BBB/Stable
Letter of Credit 15 CRISIL A3+ Letter of Credit 15 CRISIL A3+
Loan Equivalent Risk Limits 5.25 CRISIL A3+ Loan Equivalent Risk Limits 5.25 CRISIL A3+
Proposed Long Term Bank Loan Facility 62.5 CRISIL BBB/Positive Proposed Long Term Bank Loan Facility 62.5 CRISIL BBB/Stable
Total 98.5 -- Total 98.5 --
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
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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