Rating Rationale
September 17, 2018 | Mumbai
Piramal Enterprises Limited
Rated amount enhanced 
 
Rating Action
Rs.12000 Crore Commercial Paper Programme (Enhanced from Rs.9000 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of Piramal Enterprises Limited (PEL).

The rating reflects the company's strong business profile backed by diversified revenue streams, established presence in the regulated markets through niche products, healthy growth prospects in the global pharmaceutical (pharma) and over-the-counter (OTC) businesses, high operating efficiencies due to accredited facilities in India and overseas, and extensive experience of promoter. The rating also factors in PEL's strong financial flexibility as the holding company of the Piramal group, availability of unutilised bank limits, demonstrated fund-raising ability, and refinancing capability.

These strengths are partially offset by modest performance of the company's healthcare information analytics (HIA) business, moderate financial metrics as some of the recent acquisitions are yet to contribute adequately, and significant term debt.

Analytical Approach

For arriving at the rating,
* Holding company approach has been followed for the wholly-owned financial subsidiary as it is significantly important to PEL
* The credit risk profiles of PEL and its subsidiaries engaged in the global pharmaceutical, consumer products division (OTC), and HIA businesses have been combined because of their commonality of management and fungible funds. The 49:51 joint venture, Allergan India, has been moderately integrated
* Assets and liabilities of Rs 9,150 crore relating to the financial services business would be transferred to its financial subsidiary and have, therefore, not been considered in the analysis of PEL
* Goodwill on acquisition has been amortised over a period of 10 years. Networth has also been adjusted for deferred tax assets.

Key Rating Drivers & Detailed Description
Strengths
* Strong business profile due to diversified revenue streams, and healthy growth prospects in key segments:
Over the years, PEL has emerged as 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). It is also present in the OTC segment in the domestic pharmaceutical market. Besides, it has an HIA business that partners global pharma companies. Global Pharma (including CRAMS and critical care), OTC and HIA accounted for 72%, 6% and 22%, respectively of total pharma and HIA sales in fiscal 2018.

PEL is present in the entire value chain of the pharmaceuticals drug lifecycle - from development and commercial manufacturing to off-patent supplies of active pharmaceutical ingredients and formulations. In the critical care segment, it has a strong portfolio of niche branded generic hospital products, and is also among the top global players in inhalation anaesthetic products. In OTC drugs, PEL 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). The Indian government has recently banned production, sale and marketing use of over 300 fixed dose combination (FDC) drugs, including Saridon. However, the Supreme Court has allowed sale of Saridon on a petition by the company and has given four week time to the government to respond. 

* High operating efficiencies supported by experienced management and accredited manufacturing facilities: The pharma business benefits from promoter's experience of nearly three decades. Also, presence in the niche pharma generic segments in the global pharma space has led to a higher operating margin than domestic peers.

The company has diverse manufacturing facilities across the world, including some acquired through acquisitions. It has CRAMS facilities in North America, Europe, and Asia; with approvals from the US Food and Drug Administration and Medicines and Healthcare products Regulatory Agency (UK) for key sites abroad and in India. PEL is among the few Indian pharmaceutical 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.

PEL's pharma business is spearheaded by its promoters ' the Piramal family - along with experienced professionals heading various verticals. The growth is largely through acquisitions and key personnel from the acquired entities have been retained to ensure streamlining of and continuity in operations.

* Strong financial flexibility as holding company of the group
PEL, holding company of the Piramal group, enjoys strong financial flexibility driven by the sizeable value of its holdings mainly in the financial services businesses. This provides flexibility to raise funds through dilution of equity should the need arise.

PEL has invested Rs 4,583 crore in three different Shriram group entities (which has increased materially in terms of value), and holds 100% stake in its financial subsidiary (Piramal Capital and Housing Finance Ltd [PCHFL]) in which it has invested Rs 6,497 crore over time. Till 2016, the financing business was largely carried out in PEL with limited operations in the financial subsidiary. In fiscal 2017, following a business restructuring, a sizeable portion of the assets and liabilities relating to the financial business, were transferred from PEL to PCHFL.

As on June 30, 2018, the financial service business portfolio stood at Rs 46,995 crore, of which real estate financing (Construction Finance, Mezzanine and Lease Rent Discounting) constituted around 74%, making it one of the largest lenders in this space in India. The remaining comprises credit to corporates across multiple sectors under the corporate finance group (CFG) and emerging corporate loans segments. The housing finance portfolio is currently small at around Rs 1,600 crore within few months of operations and is expected to grow rapidly.

Utilisation of total fund-based limit of Rs 3,300 crore was low at 45% during the six months ended June 30, 2018. The company also had sizeable cash balances of about Rs 2,500 crore at March 31, 2018, adding to its financial flexibility.

Moreover, the promoter group successfully raised Rs 7,000 crore in the form of compulsory convertible debentures and rights issues (Rs 5,000 crore for the financial services business and Rs 2,000 crore for the pharma segment) in the recent past. PEL has also contracted debt at competitive rates, including for capital spending, growth of the financial services business, acquisitions, and refinancing of existing debt.

While PEL's financial flexibility is strong, it is also dependent on prevailing market sentiments and movement in share prices of key investments. Any increase in systemic risks, impacting financial flexibility, will be a monitorable.

Weaknesses
* Modest performance of the HIA business: PEL ventured into the HIA business by acquiring Decision Resources Group. However, returns from this business have not been as expected due to evolving customer requirements. The segment has also been affected in recent years by need for large workforce and increased customised research requirements from clientele; the demand for customised research accounted for 30% of HIA's revenue and was negligible until few years back. Turnover was stagnant at Rs 1,200 crore for fiscal 2018 while operating margin moderated to 15% from over 25% historically. While PEL has made investments to cater to client requirements, improvement in the HIA's business over the medium term will be critical.

* Moderate credit metrics: PEL has grown its global pharma, OTC, and HIA businesses largely through acquisitions (worth about USD 500 million in the last 30 months). While revenue has ramped up, these acquisitions are yet to contribute materially on profitability and were largely debt-funded, leading to modest credit metrics and return on capital employed for fiscal 2018. Net worth, however, was sizeable and healthy.

Capital spending in the pharma business is expected to be prudent as sufficient capacities exist, 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 levels and lower debt. Large debt-funded acquisition will be a credit monitorable.

* Significant upcoming term debt repayment: PEL has term debt repayment of about Rs 4,424 crore in fiscal 2019 and Rs 2,208 crore in fiscal 2020 (for the non-financial business), which will require part-refinancing as cash generation from operations and available unutilised bank limit may not be adequate. Nevertheless, PEL's management has demonstrated its ability to arrange for refinancing of debt obligation in a timely manner, and is expected to continue to do so. 
About the Company

Founded by Mr Ajay Piramal, PEL manufactures pharmaceuticals for CRAMS, critical care (comprises inhalation and injectable anaesthetics), OTC, and HIA segments. It is also present in the financial services space through PCHFL. PEL also holds substantial stake in listed Shriram group investments, whose market value has increased materially in the recent past.

In the pharmaceutical 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 pharmaceutical domestic formulation business to Abott Laboratories for Rs 17,000 crore, and thereafter invested a portion of the proceeds in the Vodafone India group. It exited the Vodafone India 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.

Under HIA, the company offers high-value data, analytics, and insight products and services to global pharmaceutical, biotech, and medical technology companies. The company also had an imaging business under its subsidiary ' Piramal Imaging SA which did not have any significant revenues. In the first quarter of fiscal 2019, PEL sold it for about Rs 8 crore at a net loss of Rs 452 crore.

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) CFG, which lends to corporate clients across sectors (infrastructure, cement, renewables, auto, 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 June 30, 2018, promoter and promoter group entities held about 51% stake, followed by foreign portfolio investors with 27%, mutual funds, banks, financial institutions, and general public held the rest.

For the quarter ended June 30, 2018, PEL on a standalone basis, reported a net loss of Rs (130) crore (profit of Rs 248 crore for the quarter ended June 30, 2017), on net revenues of Rs 2,903 crore (Rs 2,254 crore for the quarter ended June 30, 2017).  Profitability in the first quarter of fiscal 2019, was impacted due to one-time impairment cost on sale of imaging business.

Key Financial Indicator (Standalone)
As on/for the period ended March 31 2018 2017
Revenue Rs crore 3,297 3,809
Profit After Tax (PAT) Rs crore 518 776
PAT Margins % 15.7 20.3
Total debt/total networth Times 0.68 0.71
Interest coverage Times 1.9 1.7

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Rating assigned with outlook
NA Commercial Paper Programme NA NA 7-365 days 12000 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  12000.00  CRISIL A1+  11-09-18  CRISIL A1+    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for the Pharmaceutical Industry
CRISILs Criteria for rating short term debt
Understanding CRISILs Ratings and Rating Scales

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