Based on the request by Piramal Enterprises Limited (PEL) as part of the change in their debt strategy, CRISIL has reduced the quantum of rated Commercial Paper (CP) of PEL to Rs 6,000 crore from Rs 12,000 crore. The rating on the Rs 1,500 crore short term non-convertible debentures has also been withdrawn, at the request of the company, as the same has been completely repaid. This is in-line with CRISIL's withdrawal policy.

For arriving at the rating,

• Holding company approach has been followed for the wholly-owned financial subsidiaries, Piramal Capital and Housing Finance Ltd [PCHFL, rated 'CRISIL A1+'] and PHL Fininvest Private Ltd as they are  significantly important to PEL
• The credit risk profiles of PEL and its subsidiaries engaged in the global pharma, and over the counter (OTC) consumer products businesses have been combined because they have a common management and fungible funds. The 49:51 joint venture (JV), Allergan India, has been moderately integrated.
• The funds raised through the issue of compulsorily convertible debentures (CCD) has been treated as equity as these will compulsorily be converted to equity.
• Assets and liabilities of Rs 1,600 crore relating to the financial services business are expected to be transferred to the financial subsidiary, and have, therefore, not been considered in the analysis.
• Goodwill on acquisition has been amortised over a period of 10 years.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Strengths
* Strong business risk profile due to diversified revenue streams, and healthy growth prospects in key segments:
PEL is a leading player in the critical care segment in branded generics and is also one of the main global pharma contract development and manufacturing organisations (CRAMS). The company is present in the entire value chain of the pharma lifecycle ' from development and commercial manufacturing to off-patent supplies of active pharmaceutical ingredients (APIs) and formulations. It is also present in the over the counter (OTC) segment in the domestic pharmaceutical market. Global pharma (including CRAMS and critical care) and OTC accounted for 91% and 9%, respectively of total pharma sales during first nine months of fiscal 2020. During fiscal 2020, the company divested its Healthcare Insights and Analytics (HIA) business for a consideration of USD 950 million (~Rs 6,750 crore).
 
The pharma segment registered 14% revenue growth during the nine months of fiscal 2020 over the corresponding period of the previous year. This was mainly led by steady demand in complex hospital products (inhalation and injectable anaesthesia, pain-management, and intrathecal spasticity) and healthy order-book in the services segment. The services segment benefited from the recent capacity expansion in the high-potent bulk drugs and growth in API development and manufacturing businesses. In OTC drugs, it is the fifth-largest player in India with strong brands such as Saridon, Lacto Calamine, and I-pill (8 brands among India's top 100 OTC brands).
 
While the pharma industry in general has a dependence on China or several key starting materials and intermediates, PEL is dependent on China for less than 15% of its raw material requirements, and also has diversified alternative sources. Accordingly these supply disruptions may not have an impact on the overall business risk profile.
 
Over the medium term, growth in pharma segment is likely to be aided by increase in sales from new acquisitions, launch of new products, and steady revenue in the CRAMS segment.
 
* High operating efficiency supported by an experienced management and accredited manufacturing facilities:
The promoters' experience of nearly three decades in the pharma industry and the company's presence in the niche pharma generics segments in the global pharma space should continue to support the business. Operating margin increased to ~24% during the nine months of fiscal 2020, (20% in fiscal 2019) aided by steady demand in complex products and healthy order-book in the services segment.
 
PEL has manufacturing facilities across the world, including some acquired. It has CRAMS facilities in North America, Europe, and Asia; with approvals from the US Food and Drugs Administration (US FDA) and Medicines and Healthcare Products Regulatory Agency (UK) for key sites abroad and in India. PEL is among the few Indian pharma companies whose facilities have cleared audits conducted by global regulatory agencies, without material observations or stoppage of work. This reflects the company's superior product quality and processes
 
The pharma business is spearheaded by the promoters, the Piramal family members, along with experienced professionals heading various verticals. The growth is largely through expansion of wallet share of existing customers, healthy order book pipeline and acquisitions and key personnel from the acquired entities have been retained to ensure streamlining of, and continuity in, operations. 
 
* Adequate financial flexibility as the holding company of the group:
PEL, as the holding company of the Piramal group, has adequate financial flexibility driven by the sizeable value of its holdings mainly in the financial services businesses, including in the Shriram group. This provides flexibility to raise funds through dilution of equity should the need arise. PEL had invested Rs 4,583 crore in three Shriram group entities; this has increased materially in terms of value. In June 2019, it sold its investment in Shriram Transport Finance Corporation (STFC) for about Rs 2,300 crore. Further in December 2019, the company has raised Rs. 1,750 crore through preferential allotment of CCDs to Caisse de depot et placement du Quebec (CDPQ). In January 2020, the company has successfully raised Rs 3,650 crore through rights issue along with divestment of HIA business, for consideration of ~Rs. 6,750 crore.
 
Part of the funds raised have been used for deleveraging the balance sheet and part of the funds have been extended as inter-corporate deposits (ICDs) to the group's financial services businesses.
 
Till 2016, the financing business was largely carried out in PEL with limited operations in the financial subsidiaries. In fiscal 2017, following a business restructuring, a sizeable portion of the assets and liabilities relating to the financial business were transferred to the wholly owned subsidiaries. PEL also had a loan book of Rs 1,600 crore, on a standalone level, as on December 31, 2019. CRISIL expects the transfer of financial services loan book and the corresponding debt, to happen within the next 12 -18 months.
 
The group's management proposes to raise funds through divestment of part stake in the pharma business and also plans to divest its stake in Shriram City Union Finance Ltd (SCUF) and Shriram Capital Ltd (SCL) in the near term. PEL's financial flexibility is largely dependent on prevailing market sentiments and movement in share prices of key investments, as well as performance of its financial subsidiaries. Any increase in systemic risks, impacting financial flexibility, will be a monitorable.
 
Weaknesses
* Moderate credit metrics
The global pharma and OTC businesses have been grown largely through acquisitions (worth about USD 500 million in the past 30 months). While revenue has been increased, these acquisitions are yet to contribute materially to profitability and were largely debt-funded, leading to modest credit metrics and return on capital employed(RoCE) for fiscal 2020. The net worth, however, was sizeable. Capital expenditure (capex) in the pharma business is expected to be prudent, while the OTC business functions largely on the outsourcing model. Credit ratios are expected to improve with increasing contribution from recent acquisitions leading to higher profitability, and lower debt. Any large, debt-funded acquisition will be a credit monitorable.
 
Operating efficiencies have been impacted by modest RoCE levels, due to huge capital deployed.  Also, as a holding company, PEL has sizeable investments in the financial subsidiaries, loans and advances and investments in other subsidiaries. Apart from these, they made significant acquisitions in the global pharma and OTC business, which too impacted RoCE levels. While the company has exited from HIA business, the funds were utilised for lowering debt levels. Reduction in debt will lead to gradual improvement in the RoCE levels over the near to medium term.
 
* Moderate funding risk
During fiscal 2020, the company has raised capital of Rs. 5,400 crore (rights issue and preferential allotment of CCD) together with inflows from sale of business/ investments (STFC and HIA) of Rs. 9,050 crore, thereby deleveraging its balance sheet at an overall level and improving its funding mix. While debt levels have reduced, the repayment obligations in fiscal 2021 continues to remain considerable. These are expected to be met from existing consolidated cash surpluses (around Rs 2,800 crore), and available consolidated unutilised bank limits (Rs 4,300 crore), cash flows from operations, asset sale proceeds, liquidation of investments as well as part refinancing through long term borrowings.
 
The management has demonstrated its ability to arrange for refinancing of debt in a timely manner, and is expected to continue to do so. Besides, the group has applied for moratorium on part of its borrowings from banks, as part of the recent announcement by Reserve Bank of India, and the decision on the same is awaited. The company also continues to take steps to improve its funding mix by increasing long-term funding sources at consolidated level. Nevertheless, with dependence on refinancing partly remaining, future steps taken by management to improve its borrowing mix and maturity profile will be a key monitorable.
 
* Regulated nature of pharma business
The company is exposed to regulatory changes in the Indian and global markets. These are reflected in increasing scrutiny and inspections by authorities, including the US FDA in 2019. However, the group has demonstrated track record of 36 successful inspections by US FDA since 2011. Further, the company has successfully cleared 3 US FDA inspections at Bethlehem, Lexington and Pithampur during the nine months of fiscal 2020.

PEL's liquidity is adequate, and supported by healthy cash generating ability of its pharmaceutical business, financial flexibility of the group in the form of investments in financial services, including the Shriram group and in its financial subsidiaries.
 
The management has taken steps to raise equity as well as long term borrowings, thereby resulting in overall consolidated debt levels reducing by an estimated 29%, compared to debt levels in fiscal 2019. Nevertheless, overall repayment obligations still are considerable in fiscal 2021 at an overall level. These obligations are expected to be met by existing consolidated cash surpluses (estimated at over Rs.2,800 crore at March 31, 2020), cash generation from operations, available consolidated unutilised bank limits of around Rs. 4,300 crore, long term borrowings and asset inflows from monetisation of Shriram group investments and part stake sale in the pharma business.
 
At a consolidated level, CP outstanding declined to about Rs 1,100 crore as on March 31, 2020 from about Rs 8,800 crore as on March 2019.  While the current CP balances are low, in event the company raises additional CP for working capital PEL will continue to maintain liquidity backstop for the CPs maturing, in form of cash as well as unutilised sanctioned bank lines.
 
PEL has a good track record of refinancing loans and also raising funds, to meet its requirements, across businesses. However, the NBFC sector is facing some challenges in raising funds for refinancing as well as for growth capital, because of the tepid environment, especially for firms with high exposure to real estate and wholesale lending. Hence reliance on PEL for funding support to the group's NBFC businesses will remain high in the near term, and will continue to be a key monitorable.

Rating Sensitivity Factors
Downward Factors
* Sharp reduction in pharma business operating profitability to below 13-15%, and debt to earnings before interest depreciation tax and amortisation (EBITDA) of pharma segment of more than 3.75 - 4.00 times on a sustainable basis.
* Continued moderate credit metrics due to a substantial decline in cash flows from the pharma business.
* Limited improvement in liquidity profile on a consolidated basis.

Founded by Mr Ajay Piramal, PEL manufactures pharmaceuticals for CRAMS, critical care and OTC segments. It is also present in the financial services space through PCHFL. PEL also holds substantial stake in Shriram group companies, whose market value has moderated in the past 12 months, in-line with the sentiment in the NBFC space, but still remain above the original investment made.
 
In the pharma space, PEL offers services across the entire drug lifecycle-from development and commercial manufacturing to off-patent supplies of APIs and formulations. Its critical care portfolio largely comprises inhalation and injectable anaesthetics.
 
In fiscal 2013, PEL sold its domestic pharma formulations business to Abbott Laboratories for Rs 17,000 crore, and thereafter invested a portion of the proceeds in the Vodafone India group. It exited this group in fiscal 2015, netting proceeds of about Rs 3,000 crore. It re-established its pharma business by acquiring Coldstream in fiscal 2015, Ash Stevens Inc in 2016, and products from Jannssen and Mallinckrodt in fiscal 2017.
 
PCHFL has four business verticals: (i) real estate financing - lending to real estate developers with established track record, with greater focus on providing loans for construction finance and lease rental discounting, (ii) corporate finance group, which lends to corporate clients across sectors (infrastructure, cement, renewables, automotive, logistics, services, and entertainment) with loan size greater than Rs 100 crore, (iii) Emerging Corporate Group that provides finance to mid-tier companies with loan size of up to Rs 100 crore, and (iv) housing finance. PEL also manages a real estate-focused private equity fund and has strategic alliances with global funds.
 
The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on December 31, 2019, promoters and promoter group entities held about 46% stake, followed by foreign portfolio investors with 29%; mutual funds, banks, financial institutions, and the general public held the rest.
 
For the first nine months of fiscal 2020, revenue was Rs 3230 crore and profit after tax Rs 629 crore, as against revenues of Rs 2658 crore and a loss of Rs 804 crore, respectively, in the corresponding period of the previous fiscal.

Any other information: Not applicable