Rating Rationale

Strengths:
* Healthy market position and promoters' extensive experience:
The promoters have over three decades of experience in the pharmaceutical industry. The company has positioned itself as an ethical drug manufacturer, with established brands such as Beminal Forte, Fexid, and DVN (drotaverine hydrochloride). The company primarily specialises in nutraceuticals, analgesics, antipyretics, and antispasmodic. The company has established strong relationships with its customers and suppliers over the years, and has a strong network of 22-25 carrying and forwarding agents, above 3,000 stockists, and a field force of over 800 personnel. The company has a diversified geographical reach, operating in Uttar Pradesh, Rajasthan, Haryana, Punjab and Gujarat. The company also supplies to various institutions such as the ESI, Armed Forces, and state governments. The company has been able to register moderate compound annual growth rate (CAGR) of 16% over the three years through fiscal 2020; 30% year-on-year growth in fiscal 2020 was supported by addition of new product lines such as ortho product segment, urology segment and infertility segment along with diversification in geographical reach in Karnataka, Delhi and Mumbai.
Although, the pharma sector has been classified as essential services by the government and the operations are allowed amid nationwide lockdown due to the coronavirus pandemic, but the capacity utilisation has come down to 60-70% level as against 90-95% level in normal days. Hence the revenue is expected to decline by around 15% in FY'21.

* Healthy financial risk profile:
Financial risk profile should remain healthy over the medium term due to absence of major debt-funded capex plan. Net worth is expected to improve to Rs 24.27 crore as on March 31, 2020, from Rs. 21.19 crore a year ago due to increase in accretion to reserve. Gearing is expected to be at 0.37 times as on March 31, 2020, due to absence of large capital expenditure (capex) and is projected at 0.20-0.30 time over the medium term. Debt protection metrics are comfortable with expected net cash accrual to total debt (NCATD) and interest coverage ratios of 0.20 time and 2.61 times, respectively, in fiscal 2020. Despite the impact of Covid-19 on the business risk profile, the financial risk profile will continue to remain healthy over the medium term.

Weaknesses:
* Modest scale of operations amid intense competition:
OHCPL operates in the pharmaceutical formulations industry. The company's presence is restricted to the domestic market, which is marked by high fragmentation owing to low capital intensity and minimal gestation period. The domestic market comprises 300-400 organised players and the top five players ' Cipla Ltd, Ranbaxy Laboratories Ltd, GlaxoSmithKline Pharmaceuticals Ltd, Cadila Healthcare Ltd (rated CRISIL AA+/Stable/CRISIL A1+'), and Piramal Healthcare Ltd -- account for significant portion of the market share. The high fragmentation is expected to intensify competition in the long run because of the aggressive pricing strategies of mid-sized formulators.

Scale has been modest, with expected net revenue of Rs 148.81 in fiscal 2020. Intense competition has led to pricing pressures and made the company adopt aggressive marketing strategies, with a stagnant operating margin. Operating margin will remain at 5% due to intense competition.

* Large working capital requirement:
Operations may remain working capital intensive over the medium term owing to moderately high debtors and sizeable inventory. However, working capital has thoroughly improved for last five fiscals, marked by GCA of 103 days as on March 31, 2019, driven by debtors of around 51 days (against 72 days a year ago). Debtors were high because payment realisation depends upon sales on stockists end. Debtors may steady improve over the medium term due to faster sales realisation at the stockist's end and management's sustained efforts on improving debtor collection period supported by increasing brand image. Inventory increased in fiscal 2018 and was around 55 days due to diversification in product portfolio and increased geographical reach. The company procures its raw material from suppliers based in Gujarat and Maharashtra wherein it gets extended credit period. Creditors were around 103 days as on March 31, 2019, and are expected to decrease marginally over the medium term.

* Exposure to regulatory risk and raw material price volatility:
The pharmaceutical industry is a closely monitored and regulated industry and as such there are inherent risks and liabilities associated with the products and their manufacturing. Furthermore, the key raw material required for the manufacturing primarily include active pharmaceuticals ingredients, the prices of which are volatile in nature. Hence, the company remains susceptible to risk of variations in commodity price.