Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of Micro Labs and its subsidiaries, given significant operational and financial linkages. The entities are collectively referred to as the Micro Labs group. Crisil Ratings has adjusted the loans and advances towards unrelated businesses from the networth.
 

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 position in the domestic formulations segment: The Micro Labs group ranks among the top 20 companies in the domestic formulations market and has a market share of around 1.69% as per the All-India Organisation of Chemists and Druggists-AWACS data. It has an established market position in therapies such as anti-diabetes, pain management, ophthalmology, and the central nervous system. Continued focus on chronic and sub-chronic therapeutic segments, along with diversification into newer therapeutic segments, will drive growth.

• Diversified revenue across therapeutic segments and geographies: The domestic market accounted for about 48% of the group’s revenue in fiscal 2024. The group is present in all major therapeutic segments, except oncology and respiratory. The chronic care segment accounts for around 50% of its domestic revenue. To offset any adverse impact of regulatory changes and ensure sustained revenue growth, the group aims to maintain a balanced portfolio between chronic and acute drugs. Apart from the domestic market, the group has presence in several regulated and semi-regulated markets. Exports formed 52% of the revenue in fiscal 2024, with a presence in regulated markets and institutional sales.

• Improved operating performance: Overall revenue has grown by 10% in compounded terms over five 2019 to 2024. The growth in operating revenues is estimated at 5-6% in fiscal 2025, led by growth in export market. Going forward, the group is likely to report near single to low double-digit growth in revenue, supported by its established market position and regular product launches. Operating margin has been steady in the range of 22-24% over the past two fiscals and is estimated at ~24-25% in fiscal 2025. Backward integration and cost optimisation measures and better economies of scale should support the margin profile going forward.

• Sustained healthy financial profile: Financial risk profile remains strong, with adjusted networth expected to be Rs 6,880 crore as on March 31, 2025. Consequently, adjusted gearing will remain comfortable at 0.08 time as on March 31, 2025. Going forward, with capex plans to be funded largely through internal accrual, gearing is likely to remain in the same range at 0.07-0.08 times. Net cash accrual to total debt and interest coverage ratios expected to continue healthy, at 2.44 times and 43 times, respectively, in fiscal 2025. While the company has substantial exposure towards its non-core business (Rs 2,269 crore as on Dec 31, 2024). Any sizeable increase in investment in the financing business materially impacting the capital structure will remain monitorable.

Weaknesses:

• Exposure to unrelated businesses limiting the financial flexibility: The Micro Labs group started financing real estate projects a decade ago, and its direct exposure includes loans to few developers. Direct investments in the unrelated financing business increased to Rs 2,269 crore as on Dec 31, 2024, from Rs 779 crore as on March 31, 2021, and the company may remain invested here. Moreover, company shall make land purchases and lease out the parcels to developers to earn regular lease payments; investments in the said land parcels should also be within Rs 200 crore annually and shall be funded through the liquidity surplus. The group has recently made a land purchase of Rs 125 crore as on Mar 31, 2024 and Rs 118 crore till Dec 31, 2024. While the group plans to demerge the financing activities over the medium term, any significant increase in investments in the interim impacting the financial risk profile will be a key rating sensitivity factor.

• Susceptibility to intense competition and regulatory changes: Despite the group’s established presence in the acute segment, intense competition constrains its pricing power in the domestic market. Pricing flexibility remains constrained as 15-18% of its products fall within the ambit of the Drugs Price Control Order (DPCO). However, a diversified product profile (the top five brands accounted for less than 25% of revenue in fiscal 2024), which includes products priced below the ceiling, should help mitigate the impact. Addition of more drugs under DPCO by the regulator could lower realisations and impact revenue growth. Also, the Micro Labs group has to comply with regulations in export destinations and remains subject to inspections by the US Food and Drug Administration and other regulators.

• Large working capital requirement: Gross current assets are likely to be around 269 days as on March 31, 2025, driven by large inventory and export receivables. The group operates in multiple geographies, has a wide product portfolio, and maintains substantial inventory to ensure adequate supply. Given the steadily expanding product portfolio and increasing export sales, operations will remain working capital intensive over the medium term.

Annexure - Details of Instrument(s)

*Fully interchangeable with packing credit

Annexure – List of Entities Consolidated

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