March 16, 2016
Mumbai
Neuland Laboratories Limited
 
Rating outlook revised to 'Negative', Ratings placed on 'Notice of withdrawal'
 
Total Bank Loan Facilities Rated Rs.2600 Million
Long Term Rating CRISIL BB+/Negative (Outlook revised from 'Stable'and rating reaffirmed)
Long Term Rating CRISIL BB+/Negative (Outlook revised from 'Stable' and placed on 'Notice of Withdrawal')
Long Term Rating Withdrawal
Short Term Rating Notice of Withdrawal
(Refer to Annexure 1 for Facility-wise details)

CRISIL has revised its rating outlook on all the long-term bank facilities of Neuland Laboratories Ltd (Neuland) to 'Negative' from 'Stable'. The rating on the proposed long-term bank loan facility has been withdrawn, at the company's request, as it has not availed of the facility. The rating on the term loan is reaffirmed at 'CRISIL BB+'. The ratings on the other bank facilities have been reaffirmed at 'CRISIL BB+/CRISIL A4+', and placed on 'Notice of Withdrawal' at the company's request. The ratings on these facilities shall be withdrawn at the end of the notice period of 180 days, in line with CRISIL's policy on withdrawal of its bank loan ratings.
 
The outlook revision reflects Neuland's constrained liquidity on account of increasing working capital intensity. This, in turn, is driven by the change in business model with more focus on scale-up in custom manufacturing business (CMS) over the past two years, which has a longer working capital cycle than the existing business. The revenue contribution from CMS division increased to 15 percent in 2014-15 (refers to financial year, April 1 to March 31) from 6 percent in 2012-13, and around 20 percent for the nine months through December 2015. CRISIL expects Neuland's operations to remain working capital intensive over the near-to-medium term as it plans to ramp-up the revenue contribution from CMS business to around 30 percent by 2017-18.
 
The increase in working capital intensity has resulted in a sharp increase in creditors to 160 days as on March 31, 2015, from 112 days the previous year; it remained high at 149 days as on December 31, 2015. The creditor levels have stretched, while there was an improvement in operating profitability; Neuland's operating profitability improved to 15.2 percent for the nine months ended December 31, 2015, as against 12.8 percent during the previous corresponding period. Furthermore, the bank lines remain highly utilised despite subdued overall revenue growth. CRISIL believes Neuland's credit quality will critically hinge on sustained improvement in working capital management. Any further stretch in the working capital cycle over the medium term may lead to liquidity pressures and will remain a key rating sensitivity factor.
 
The ratings continue to reflect the extensive experience of promoters in the pharmaceutical industry, and the average financial risk profile because of healthy networth, and improving gearing and debt protection metrics. These rating strengths are partially offset by Neuland's large working capital requirement, and the susceptibility to adverse movements in raw material prices and foreign exchange rates.

Outlook: Negative

CRISIL believes Neuland's operations will remain working capital intensive over the medium term. The company will, however, continue to benefit from its established market position. The ratings may be downgraded in case of a decline in cash accrual, further stretch in the working capital cycle, or large, debt-funded capital expenditure, impacting Neuland's key credit metrics. Conversely, the outlook may be revised to 'Stable' in case of a significant and sustained improvement in liquidity, driven most likely by improved operating performance and working capital management.

About the Company

Neuland was set up as a private limited company in 1984 by Dr. D R Rao and Mr. G V K Rama Rao; it was reconstituted as a public limited company, with the present name, in 1994. It manufactures active pharmaceutical ingredients for global pharmaceutical companies and also provides end-to-end solutions to the pharmaceutical industry for chemistry-related services. Neuland has two manufacturing facilities in Hyderabad.

Annexure 1 - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Million) Rating Facility Amount (Rs.Million) Rating
Bank Guarantee 10 CRISIL A4+(Notice of Withdrawal) Bank Guarantee 10 CRISIL A4+
Bill Discounting 100 CRISIL A4+(Notice of Withdrawal) Bill Discounting 100 CRISIL A4+
Cash Credit 900 CRISIL BB+/Negative(Notice of Withdrawal) Cash Credit 900 CRISIL BB+/Stable
Letter of Credit 650 CRISIL A4+(Notice of Withdrawal) Letter of Credit 650 CRISIL A4+
Proposed Long Term Bank Loan Facility 752.5 withdrawn Proposed Long Term Bank Loan Facility 390 CRISIL BB+/Stable
Receivable Factoring 150 CRISIL A4+(Notice of Withdrawal) Receivable Factoring 150 CRISIL A4+
Term Loan 37.5 CRISIL BB+/Negative Term Loan 400 CRISIL BB+/Stable
Total 2600 -- Total 2600 --
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March 16, 2016

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