Detailed Rationale

CRISIL Ratings has downgraded its rating on the long term bank loan facilities of Sahajanand Medical Technologies Limited (SMTL; part of Sahajanand Group) to ‘CRISIL BBB+/Negative’ from ‘CRISIL A-/Negative’.

 

The rating action reflects deterioration of business risk profile with significant drop in operating margin, resulting in lower cash accrual coupled with further deterioration in ratio of debt to earnings before interest, depreciation, taxes, and amortization [EBIDTA]. Group is estimated to report revenue of around Rs 691 crore in fiscal 2022 at an operating margin (EBIDTA) of 6.2% (including ESOPs of Rs 23.34 crore) against Rs 589 crore and 9.1% in fiscal 2021. Group’s operating margin has steadily reduced over past 4 years from 19.1% in fiscal 2019 partly on account of increased employee cost and relatively higher share of trading income. Group’s new product, which was expected to drive the addition of newer products and thereby support revenue growth, also has exhibited slower-than-expected scale-up. Accordingly, debt to EBIDTA remains high along with moderation in debt protection metrics to around 2 times for fiscal 2022. Further, while the group has raised pre-initial public offering (IPO) money of around Rs 82 crores, and had filed a draft red herring prospectus with Securities and Exchange Board of India for a fresh issue of Rs 400 crore, infusion of equity either through successful completion of the IPO or though new set of private equity/ strategic investors and accordingly correction in capital structure and debt to EBIDTA would remain key monitorable.

 

CRISIL Ratings’ rating continues to reflect the extensive experience and technical expertise of the promoters and professionals, in manufacturing coronary intervention devices and a Sizeable market share coupled with robust distribution network. These rating strengths are partially offset by the volatile although moderate operating margin, large working capital requirement, and exposure to regulatory risks.

Analytical Approach

CRISIL Ratings has consolidated business and financial risk profile of SMTL with Sahajanand Medical Technologies Ireland Ltd (SMTIL, 100% subsidiary), SMT Cardiovascular Pvt Ltd (SMTCPL, 100% subsidiary), Zarek Distribuidora De Produtos Hospitalares (75% step-down subsidiary), Sahajanand Medical Technologies Iberia SL, Spain (89% step-down subsidiary), Vascular Concepts Ltd (100% subsidiary) and Vascular Innovations Ltd (100% step-down subsidiary). This is because all these entities (together referred to as SMTL group), are engaged in similar line of business and derive synergies from each other. SMTL has also given corporate guarantees for debt availed by SMTIL.

 

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 experience and technical expertise of the promoters: Post foundation of SMTL group by Mr Dhirajlal Kotadia in 1993 to offer laser technology-based solutions to the diamond industry, over the decades, group also established itself as a pioneer in providing automated capital equipment for the diamond industry in India. The promoters then leveraged their expertise in laser technology to manufacture stents, with the help of skilled professionals with technical expertise in the medical field. High quality of products led to a favourable outcome of a randomised clinical trial study in September 2018.

 

During fiscal 2020, the group had also acquired the Imex SC, Zarek and Vascular Concepts group which has widened its distribution network and product portfolio, by including the niche product, transcatheter aortic valve implantation (TAVI). Accordingly, revenue has seen steady increase from Rs 480 crore in fiscal 2020 to Rs 691 crore in fiscal 2022. 

 

Sizeable market share and robust distribution network: Group had significant market share in range of 25-30% in the drug eluting stent (DES) market in India. Group has robust distribution network which enables them to reach out to several hospitals as well as better collection cycle as seen during H2 of fiscal 2022. Higher capacity, healthy prospects for domestic players due to a price cap, and acquisition of sales and distribution entities in Brazil and Spain, should further aid growth in the global market. Group is also expanding its network in Europe region. Impact of sales of new products from the Vascular Concepts group on revenue profile will continue to remain monitorable.

 

Weakness:

Working capital-intensive operations: Operations are working capital intensive with gross current assets (GCA) in the range of 320-350 days (including cash and cash equivalents of Rs 222 crore) over past 3 years through March 31, 2022, however same is expected to gradually improve with improvement in debtors collection cycle due to change in business model. High GCA is driven by large inventory of 90-100 days. While debtors have improved same are around 120 days. Stents vary in length, in diameter, in thickness and in flexibility, depending varying requirements for each patient. Maintaining such assortment increases inventory.

 

Volatile, though moderate, operating margin:  Operating margin has been volatile between 6.2% and 20% for three fiscals through 2022. Profitability tends to be volatile, owing to higher allocation of funds to research and development (a critical aspect of the business) activities along with change in product mix in the revenue. Moderation in operating margin along with increase in debt levels has resulted in interest coverage ratio to moderate to around 2-3 times.  While group has reported operating margin of around 10% (including ESOPs) in April-May 2022; sustained improvement in same to remain key rating sensitivity.

 

Exposure to regulatory risks: The group also remains susceptible to adverse changes in regulations or government policies. Any delay or inability in obtaining or maintaining permits/licenses/registrations could impact group’s operating performance

Liquidity: Adequate

Liquidity is marked by adequate cushion between net cash accrual and maturing debt obligations, along with healthy cash and cash equivalents of around Rs 222 crore as on March 31, 2022 supported by the equity infusion in fiscal 2022.  Net cash accrual (NCA) is expected to remain above Rs 65 crore and Rs 90 crore in fiscal 2023 and fiscal 2024. Expected NCA along with new equity and borrowing raised are adequate to cover the maturing debt of Rs 263 crore in fiscal 2023 and Rs 69.5 crore in fiscal 2024. Fund-based limit of Rs 75 crore was utilised around 83% during the 12 months through March 2022. The group’s planned capex is expected to be around Rs 30-40 crore per annum over medium term. Liquidity would also be supported by the group’s plan to raise further equity through IPO/ PE or strategic investment.

Outlook: Negative

CRISIL Ratings believes group’s capital structure and debt to EBIDTA will continue to remain under pressure in absence of equity infusion or improvement in operating margin

Rating Sensitivity Factors

Upward Factors

• Quick scale up in operations with improved operating margin of over 13% on sustained basis resulting in improved debt to EBIDTA and overall accruals
• Significant improvement in the financial risk profile, particularly capital structure on back of equity infusion and healthy accretion to reserves
• Sustained reduction in the working capital cycle

 

Downward Factors

• Decline in revenue or operating profit margin remaining below 9%, resulting in lower-than-expected cash accruals
• Significant delay in further equity infusion resulting in the capital structure remaining leveraged and leading to higher-than-expected debt to EBIDTA ratio
• Any further debt-funded acquisition or capex, or a further stretch in the working capital cycle impacting financial risk profile or liquidity.

About the Group

SMTL was incorporated in 1998, by promoter, Mr Dhirajlal Kotadia and his family members. The company manufactures medical stents used in cardiac surgeries; products are marketed under the SMT brand. PE players, Samara Capital Markets Holding Ltd and NHPEA Sparks Holdings BV, hold stakes of 33% and 17%, respectively.

 

Sahajanand Medical Technologies Ireland Ltd (SMTIEL), 100% subsidiary of SMTL, was incorporated in 2016. It undertakes research and marketing activities in Europe. 

 

SMT Cardiovascular Pvt Ltd, 100% subsidiary of SMTL, was incorporated in November 2019. The company is undertaking capex for new facility in Telangana, India.

 

Zarek Distribuidora De Produtos Hospitalares, 75% subsidiary of SMTIEL, was acquired in October 2019. It is engaged in selling, marketing and distribution of medical devices.

 

Sahajanand Medical Technologies Iberia SL, Spain, 89% subsidiary of SMTIEL, was acquired in July 2019, and is engaged in distribution of medical merchandise. 

 

Vascular Concepts Ltd, 100% subsidiary of SMTL, and Vascular Innovations Ltd, a fully-owned subsidiary of SMTIEL, were both acquired in May 2020. The companies are engaged in research, manufacturing and distribution of medical equipment such as coronary stents, cardiac closure devices, peripheral stents, unique balloon catheters like PTMC balloons and TAVI.

Key Financial Indicators (Consolidated) 

As on/for the period ended March 31	Unit	2022*	2021
Operating income	Rs.Crore	691	589
Reported profit after tax (PAT)	Rs.Crore	-29	-72
PAT margin	%	-4.1	-12.3
Adjusted debt/adjusted networth	Times	1.23	1.54
Interest coverage	Times	2.00	2.68

*Provisional

Any other information: Not applicable