| Neuland Laboratories Limited | ||||||
| 'CRISIL A-/Stable/CRISIL A2+' assigned to Bank Debt | ||||||
| Rating Action | ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of Neuland Laboratories Limited (NLL; part of Neuland Group).
Neuland 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 its established market position and diversified product basket and an established clientele. Neuland Group has developed more than 300 processes and 75 APIs and has filed over 898+ Regulatory filings in the US (55 active US DMFs), the European Union (EU) and other geographies. The group is working in expanded existing product capacities and increased level of backward integration, which will enable it to sustain healthy revenue growth. Revenues grew to Rs 764 crore in fiscal 2020 from Rs 667 crore in fiscal 2019 and is expected to grow to Rs 940 Crore in FY21. Improving scale and strong portfolio of products will help sustain the improved operating margin at 16-18%. Annual cash accrual is expected to be over Rs 110 Crore. CRISIL believes that the group will benefit from vertical integration of API & intermediates at Unit 3 and increasing product pipeline in Custom Manufacturing Solutions (CMS) business.
Adjusted Net worth increased to Rs 428 crore as on March 31, 2020, from Rs 417 crore in previous year and is expected to improve to over Rs 800 crore over the next two years. Gearing was 0.61 time as on March 31, 2020. Despite capital expenditure (capex) of Rs 250 crore over the next two years for business expansion, gearing is expected to improve to 0.45-0.5 time range due to high accretion to reserves. Debt protection metrics are healthy, with net cash accrual to total debt (NCATD) and interest coverage ratios of 16 percent and 5 times, respectively, for fiscal 2020. Financial risk profile will remain healthy over the medium term. Liquidity of the group is adequate despite high working capital utilization of 50 percent for 12 months ended January 2021.
The rating reflect the group's extensive industry experience of the promoters & establish market position in API’s segment, well established customer base, geographical diversification in revenues, healthy product diversity support the scale and sustainability and healthy financial profile. These strengths are partially offset by its susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks, working capital intensive operations and vulnerability of operating margin to fluctuations in forex rates. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Neuland Laboratories Ltd (Neuland) and with its wholly owned subsidiaries i.e. Neuland Laboratories Inc- USA and Neuland Laboratories K.K-Japan, have synergistic businesses and are operated by the same promoters and management.
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: * Extensive industry experience of the promoters & establish market position in API’s segment: Neuland moderate scale provides it an operating flexibility in an intensely competitive industry. Further, it also benefits from the promoters' experience of over the 4 decades, their strong understanding of market dynamics, and healthy relations with customers and suppliers and will continue to support the business.
* Well established customer base: Group has three business segments namely Prime API, Niche-Specialty API & CMS. Group largely caters to small/mid-size venture backed biotech companies which are working on new products. In Prime API segment group works on molecules either with a business leadership approach or partnership with client on maintaining cost efficiencies. In Niche-Specialty API segment group continues to focus on niche APIs with complex chemistry and working on filing IP for non-infringing processes. In CMS business, Group woks as a virtual extension to developers R&D team and thus was able to build healthy relationship with the customers. The revenue contribution from the prime API segment reduced to 46% in FY20 (FY18: 54%), while the niche API revenue contribution increased to 23% from 20% during the same period. The revenue contribution from niche API and CMS would be at 25% and 35%, respectively over the next three years while that of prime API segment would be at 40%. Healthy relationship with top pharma players and strong research and development capabilities ensure a healthy operating margin.
* Geographical diversification in revenues: The group caters to a wide number of clients, both in India and overseas. It consistently derives over 70-75% of its revenue from exports. In CMS business, entire revenue is derived from the regulated markets of the US, Europe and Japan. Diversity in geographic reach and clientele should continue to support the business risk profile.
* Healthy product diversity support the scale and sustainability: The group is an established player in the market and in operations for over 40 years, the scale of operations remains healthy. Neuland Labs has developed more than 300 processes and 75 APIs and has filed over 898+ Regulatory filings in the US (55 active US DMFs), the European Union (EU) and other geographies. As the group product basket in diversified, mitigating it to risk of obsolescence in case of any new technology coming into the market. Top 10 Products contribute close to 92% of Prime API, 85% in niche API and 83% in CMS segment revenues.
* Healthy financial profile :The group capital structure is expected to continue at healthy level due to lower reliance on external funds with estimated gearing of 0.5 and low total outside liabilities to adj tangible networth (TOL/ANW) of 1.1 for year ending on 31st March 2021. The group debt protection measures are expected to be healthy due to low leverage and healthy profitability. The interest coverage and net cash accrual to total debt (NCATD) ratio are estimated at 5.1 times and 0.35 times for fiscal 2021 .The group debt protection measures are expected to remain at similar level over medium term.
Weakness: * Susceptibility to fluctuations in raw material prices, intense competition, and regulatory risks: The bulk drugs industry is highly competitive due to presence of numerous domestic as well as global players, which exerts pricing pressure on individual entities. Group’s revenues declined by 10% in 2017-18 which led to lower absorption of fixed costs and was also impacted by higher raw material cost. In 2018-19 the major reason for decline is sharp increase in raw material cost which resulted in contribution margins for both API & CMS business coming down from 59% & 46% to 52% and 38% respectively. This necessitates the company to remain cost competitive to maintain profitability.
* Working capital intensive operations: Gross current assets were at 223-285 days over the three fiscals ended March 31, 2020. Its intensive working capital management is reflected in its gross current assets (GCA) of 223 days as on March 31, 2020. Large working capital requirements arise from its high debtor and inventory levels. It is required to extend long credit period. Furthermore, due to its business need, it hold large work in process & inventory. |
Liquidity: Adequate Liquidity profile of Neuland group is marked by a healthy cushion between cash accrual and maturing debt obligations and low bank limit utilization. Bank limit utilization is low around 50 percent for the past twelve months ended January 2021. CRISIL expects the utilization levels of the working capital facilities to be moderate at 60-70% considering better cash accrual generation over FY21-22.This will remain key monitorable. Cash accrual are expected to be over Rs 100 crore which are sufficient against term debt obligation of Rs 25 crore over the medium term. In addition, it will be act as cushion to the liquidity of the company. Estimated Current ratio are healthy at 1.33 times on March 31, 2021. Cash and bank balance expected to be in the range of 15-20 crore as on March 31, 2021. Low gearing and healthy net worth support its financial flexibility, and provides the financial cushion available in case of any adverse conditions or downturn in the business. |
Outlook: Stable CRISIL Ratings believe the group will continue to benefit from the extensive experience of its promoter, and established relationships with clients. |
Rating Sensitivity factors Upward factor
Downward factor
|
About the Group Neuland was incorporated as a private limited company in 1984 by Dr. D R Rao and Mr. G V K Rama Rao, later it got reconstituted as a public limited company with the present name in 1994. It is engaged in manufacturing of active pharmaceutical ingredients (API) for global pharmaceutical companies and also provides end-to-end solutions to the pharmaceutical industry for chemistry-related services. It has 3 manufacturing facilities located in and around Hyderabad- Telangana. |
Key Financial Indicators (Consolidated)
|
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)
|
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|