Detailed Rationale

Due to inadequate information and in line with the Securities and Exchange Board of India guidelines, CRISIL Ratings had migrated its ratings on the bank facilities of Maithri Laboratories Private Limited (MLPL; part of the MSN group)  to ‘CRISIL BB+/Stable/CRISIL A4+; Issuer not cooperating'. However, the management has started sharing the requisite information for carrying out a comprehensive review of the ratings. Consequently, CRISIL Ratings has migrated the ratings to ‘CRISIL A-/Stable/CRISIL A2+’.

 

CRISIL Ratings believes the MSN group's business risk profile will strengthen further over the medium term, supported by robust market position, healthy revenue visibility while maintaining a good operating margin, leading to stronger cash accrual. The rating action also factors in stable and healthy financial risk profile and strengthening of the group's liquidity profile.

 

The MSN group is expected to sustain its healthy growth momentum and register 15-20% compound annual growth rate in revenue over the medium term, backed by diversified product basket, dominant position in key product segments, and established clientele. The group is one of the leading manufacturers of active pharmaceutical ingredients (APIs) in India and has developed more than 350 products catering to different therapeutic segments. The group has continuously expanded existing product capacities and increased level of backward integration, which has enabled it to scale up operations profitably. In addition to this, the formulation business has also started contributing significantly to the revenue, backed by filings of Abbreviated New Drug Application (ANDA) which crossed 100 in number. Revenue grew to Rs 3,864 crore in fiscal 2020 from Rs 3,191 crore in fiscal 2019 and is expected to grow to Rs 4,600-5,000 crore in fiscal 2021. Improving scale and strong portfolio of products will help sustain the operating margin at 28-30%. Annual cash accrual is expected to be over Rs 950 crore. CRISIL Ratings believes the group will benefit from vertical integration of API and intermediates, increasing expertise in product formulation, along with the company's ability to manufacture finished dosage forms (FDF) that are complex and tend to have a high barrier to entry into the market.

 

Networth increased to Rs 3,243 crore as on March 31, 2020, from Rs 2,480 crore in the previous year and is expected to improve to over Rs 4,500 crore over the next two years. Gearing was 0.52 time as on March 31, 2020. Despite capital expenditure (capex) of Rs 1,200-1,400 crore (Rs 800 crore to be funded by debt) over the next two years for business expansion, gearing is expected to improve to 0.45-0.50 time due to high accretion to reserves. Debt protection metrics were robust, with net cash accrual to total debt and interest coverage ratios of 57% and 9 times, respectively, for fiscal 2020. The financial risk profile is expected to remain strong over the medium term. However, the group’s liquidity is partially constrained by high working capital utilisation of 87% for the 12 months through November 2020.

 

The Income Tax Department carried out search & seizure operations on 24th February 2021 on the group. Management has confirmed that there is no impact on the business operations and banking transactions till date and there is no demand received from the IT department specifying the liability. Any financial liability arising on the group as a result of search operations will remain a key monitorable.

 

The ratings reflect MSN group's established market position in the bulk drugs segment with healthy relationships with established players, strong research and development (R&D) capabilities, resulting in sound operating efficiencies and robust financial risk profile. However, these strengths are partially offset by large working capital requirement and susceptibility to fluctuations in raw material prices, intense competition and regulatory risks.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MSN Labs and other group companies. This is because all the companies, together referred to as the MSN group, operate under the same management, with considerable operational and financial linkages.

 

CRISIL Ratings has consolidated Novadoz Pharma LLC for the current rating exercise as the company is operated by the same promoter and has considerable operational and financial linkages with the group.

 

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 market position in the bulk drugs segment with healthy relationships with established players

The MSN group's strong market position in the bulk drugs segment (especially in APIs) is underpinned by its diversified product portfolio and client base, and sound operating efficiencies. The group has presence in domestic and export markets. There is low customer concentration and the impact of customer attrition is not expected to be meaningful. Also the customers’ ANDA filings would mention MSN group as the source, implying stickiness of the suppliers, since changing the source of the API is a time-consuming process.

 

* Strong R&D capabilities, resulting in sound operating efficiencies

The group’s R&D strengths lie in developing intellectual capital in non-infringing processes and resolving complex chemistry challenges while synthesising difficult APIs in a cost effective way. The group concentrates on high quality, high cost and low volume drugs. The R&D team consists of more than 1,000 people, with highly qualified scientists who have extensive experience in chemical research and analytical development. Majority of the scientists are involved in New Drug Discovery (NDD) and the rest in processes. It is currently ranked second in the development and manufacture of APIs for the US market. In addition, the company manufactures finished dosage oral solids, liquids and injectable products in 65 markets throughout the world. Backed by its strength in R&D, high economies of scale and enhanced level of backward and forward integrations for key products, the group has healthy operating efficiencies. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin remained healthy at 28%-35% in the four fiscals through 2020.

 

* Strong financial risk profile:

Networth is estimated to be strong at around Rs 4,000 crore as on March 31, 2021, with moderate total outside liabilities to adjusted networth ratio of 0.81 time. Also, interest coverage and net cash accrual to adjusted debt ratios are estimated to be comfortable at 7.5 times and 0.47 time, respectively, in fiscal 2021. The financial risk profile is expected to be stable over the medium term, despite debt-funded capex, supported by the management's conservative policy towards debt. 

 

Weakness:

* Large working capital requirement:

Gross current assets (GCAs) were high at 288 days as on March 31, 2020 (319 days as on March 31, 2018) driven by receivables and inventory of 150 days and 170 days, respectively. GCAs are expected to remain at similar level over the medium term. Inventory is sizeable on account of increasing the manufacture of FDF products over the past two fiscals. As adequate inventory is maintained, disruptions on account of the Covid-19 pandemic will not have a material impact on the business. Any further stretch in receivables could increase working capital requirement and will be a key rating monitorable.

 

* Susceptibility to fluctuations in raw material prices, intense competition and regulatory risks

The bulk drugs industry is highly competitive because of the presence of numerous domestic and global players, which exerts pricing pressure on individual entities. This necessitates the company to remain cost competitive to maintain profitability. Indian players, including the MSN group, also face challenges from increasing inspections and regulatory actions by authorities such as the US Food and Drug Administration (USFDA).

 

Furthermore, majority of the raw material is imported from China which exposes the group to geo-political risks. While the group is working on finding alternate procurement sources for some raw materials; meaningful diversification of raw material procurement from non-Chinese suppliers would be a key monitorable, going ahead.

Liquidity: Adequate

The MSN group is expected to report cash accrual of more than Rs 950 crore, against maturing debt of Rs 300 crore for fiscal 2021. However, bank limit utilisation was high, averaging over 87% for the 12 months ending November 30, 2020. Since healthy growth is expected, the group needs to enhance its working capital limit to fund its incremental working capital requirement over the medium term. Substantial liability (if any) on account of the recent IT search can impact the liquidity and will remain a key monitorable.

Outlook Stable

CRISIL Ratings believes the MSN group will benefit from its strong market position in the bulk drugs segment, healthy relationships with large players and strong financial risk profile.

Rating Sensitivity factors

Upward factors:

* Sustenance of healthy revenue growth of over 15% and operating profitability above 27%

* Improvement in the liquidity profile

 

Downward factors:

* Stretch in the working capital cycle with GCAs exceeding 300 days

* Any substantial, debt-funded capex or acquisition, weakening key credit metrics

* Any stretch in the liquidity profile with increase in bank limit utilisation to above 95%

* Any substantial liability falling on the MSN group as a result of the recent IT search operation

About the Group

Established in 2003 in Hyderabad, Telangana, the MSN group manufactures APIs and formulations. Operations are managed by Mr MSN Reddy. APIs contribute around 75% of the overall turnover, while the balance 25 % comes from formulations.

Key Financial Indicators- Consolidated

As on / for the period ended March 31		2020	2019
Operating income	Rs crore	3864	3191
Reported profit after tax	Rs crore	778	513
PAT margins	%	20	16
Adjusted Debt/Adjusted Net worth	Times	0.5	0.5
Interest coverage	Times	8.6	9.0

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon %	Maturity date	Issue Size (Rs Crore)	Complexity Levels	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	10.00	NA	CRISIL A-/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	2.00	NA	CRISIL A2+
NA	Term Loan	NA	NA	April 2021	2.00	NA	CRISIL A-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
MSN Laboratories Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
MSN Pharmachem Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
MSN Life Sciences Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
MSN Organics Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
Maithri Laboratories Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
MSN Research and Development Private Limited	Full	Same line of business, and have a common management and fungible cash flows.
MSN Pharmaceuticals Inc.	Full	Wholly owned subsidiary and same line if business
MSN Labs Americas S.A.S	Full	Wholly owned subsidiary and same line if business
MSN Laboratories Europe Limited	Full	Wholly owned subsidiary and same line if business
MSN Life Care SA DE CV	Full	Wholly owned subsidiary and same line if business
MSN Labs SAS Peru S.A.C	Full	Wholly owned subsidiary and same line if business
MSN Labs Chile SPA	Full	Wholly owned subsidiary and same line if business
Vivant Generics s.r.o	Full	Wholly owned stepdown subsidiary and same line if business
MSN Laboratories Netherland BV	Full	Wholly owned stepdown subsidiary and same line if business
Mega MSN Pte Ltd	50 %	50 % subsidiary and same line of business
MSNMEGA Pharma Limited	50 %	50 % subsidiary and same line of business
Novadoz Pharma LLC	Full	Same line of business, and have a common management and fungible cash flows.