Rating Rationale
February 17, 2022 | Mumbai
 
Solara Active Pharma Sciences Limited
Ratings placed on 'Watch Developing''; rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.1484 Crore (Enhanced from Rs.1320 Crore)
Long Term Rating CRISIL A-/Watch Developing (Placed on ‘Rating Watch with Developing Implications’)
Short Term Rating CRISIL A2+/Watch Developing (Placed on ‘Rating Watch with Developing Implications’)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

 

Detailed Rationale

CRISIL Ratings has placed Its ratings on the bank facilities of Solara Active Pharma Sciences Limited on Rating Watch with Developing Implications.

 

The rating action follows the significant deterioration in Solara’s revenue and profit levels for the third quarter of fiscal 2022, as per the announcement of the quarterly results on 9th February 2022. The turnover for the quarter ended December 2021 has declined to Rs.100 crore from Rs.401 crore for the previous quarter on account of a one-time impact due to change in the business strategy from a distributorship sale model to a direct customer sale model. Consequently, Solara reported an operating loss of Rs.94 crore and a net loss of Rs.140 crore for the quarter ended December 2021.

 

Net loss recorded by the company for the quarter ended December 2021 was due to two main reasons. One, revenue hit taken due to a sharp decline in demand in regulated markets from of its key product- Ibuprufen (API) which contributes close to 40-45 percent of the total revenues. Two, the company had taken a sale return of Rs.130 crore from distributors in the unregulated markets as part of its one-time business strategy reset. The sharp weakening in sales coupled with change in business strategy has resulted in sales turnover of Rs.908 crore for the 9-month ended December 2021 as against Rs.1172 crore for the same period during the previous fiscal. Consequently, the company reported an operating loss of 94 percent for the 9 months ended December 2021 from an operating profitability of 25 percent for the same period during the previous fiscal driven by sales returns and increased procurement costs. This is also expected to result in weakening of debt protection metrics; particularly interest coverage; which is expected to decline to less than 2 times for fiscal 2022. CRISIL Ratings shall monitor the performance of the company over the upcoming quarter. Improvement in revenues supported by revival of demand for key products along with a gradual improvement in profitability shall remain a key monitorable.

 

The ratings reflect Solara's established market position in its key APIs, such as Ibuprofen and Praziquantel, and strong relationships with its customers and suppliers. The ratings also factor in the company's above average financial risk profile. These strengths are partially offset by susceptibility of operations to regulatory changes, large working capital requirement, and exposure to risks related to implementation of capex and stabilisation and ramp up of the second phase of the project at Visakhapatnam

Analytical Approach:

For arriving at the rating CRISIL Ratings has consolidated the business and financial risk profiles of Solara and its subsidiaries Chemsynth Labarotories Private Limited, Sequent Penems Private Limited and Shasun USA INC.

 

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

Established market position in key APIs, along with strong customer and supplier relationships: Solara has a strong portfolio of APIs in key therapeutic segments, with expertise in anthelmintic, anti-malaria, anti-infective and non-steroidal anti-inflammatory segments. Furthermore, it has been increasing its focus on the non-steroidal anti-inflammatory segment by adding capacity, and working on other therapeutic segments. Solara has a diversified customer basis, with more exposure to regulated markets. Its longstanding presence in the industry has helped Solara build strong relationships with customers and suppliers.

 

Above average financial risk profile

Solara’s financial risk profile is above average marked by a comfortable capital structure, albeit constrained by expected weakening of its debt protection metrics. The networth is expected decline marginally at the end of fiscal 2022,. However, the gearing is expected to remain below 1 time, supported by expected strong networth of Rs.1000 crore, despite the decline. Debt protection metrics are expected to remain subdued in fiscal 2022 significantly due to decline in operating profitability. Interest coverage for fiscal 2022 is expected to remain below 2 time and is expected to improve gradually over the medium term with moderation of operating profitability. However financial risk profile is supported by a comfortable gearing and unencumbered cash and cash equivalents supporting liquidity.

 

Weaknesses

Exposure to risks related to implementation, stabilisation and ramp up of the second phase of the project at Visakhapatnam: Solara is undertaking a greenfield project at Visakhapatnam at a cost of around Rs 250 crore, to be funded through debt and equity infusion. The first phase of the project is has commenced operations from the third quarter of fiscal 2021 and the second phase is in progress and is expected to commence operations from the second/third quarter of fiscal 2023. Any time or cost overrun in the project will impact the financial risk profile adversely.

 

Exposure to risks relating to strict regulations: Most of the products manufactured by Solara face challenges of increased inspections and regulatory actions by authorities, such as the US Food and Drug Administration (US FDA). Additionally, production of a few products involves waste discharge, which needs to be treated in effluent treatment plants (ETPs). Thus, Solara needs to invest continuously to upgrade ETPs and bring efficiency in the process to reduce waste discharge.

 

Large working capital requirements

Working capital requirements are high as reflected in high receivables and inventory at around 140 days as on September 30, 2021. The working capital requirements are expected to remain high on account of lower turnover coupled with sales returns during the third quarter of fiscal 2022. CRISIL Ratings expects the working capital requirements to gradually improve over the medium term with improvement in turnover. Correction in working capital requirements that shall aid in liquidity shall be a key monitorable.

Liquidity: Strong

Solara’s liquidity is expected to remain strong over the medium term. Though cash accrual for fiscal 2022 is expected to be inadequate to meet repayment obligations due to the unanticipated losses, unencumbered cash and cash equivalents of close to Rs.118 crore as on December 31, 2021, is expected to provide cushion to liquidity to meet repayment obligations of close to Rs.20 crore in the fourth quarter of the year. With expected improvement in revenues and profitability, the cash accrual is expected to improve and be adequate for meeting repayment obligations; however shall remain a key monitorable. Further the fund based working capital limits have been utilised at close to 90 percent over the 12month ended December 2021. Improvement in cash accrual aided by improvement in operating profitability shall remain a key monitorable.

Rating Sensitivity factors

Upward Factors

  • Improvement in operating profitability to more than 20 percent.
  • More than 25% increase in turnover to levels prior to Q3 of fiscal 2022.

 

Downward Factors

  • Further deterioration in profitability resulting in cash accrual to less than Rs.50 crore
  • Continuing pressure on business risk profile due to sales returns/ lower demand in unregulated markets

About the Company

Established in October 2017, Solara was formed through the demerger of the API business of Strides Shasun Ltd (currently named Strides Pharma Sciences Ltd). Solara acquired the human API business from Sequent Scientific Ltd during the same time, and hence, is a pure play API company. The company is listed on the Bombay Stock Exchange and the National Stock Exchange.

Key Financial Indicators

As on/for the period ended March 31

 Unit

2021

2020

Operating income

Rs.Crore

1618

1329

Reported profit after tax

Rs.Crore

221

115

PAT margins

%

23.9

20.1

Adjusted Debt/Adjusted Networth

Times

0.53

1.12

Interest coverage

Times

4.86

3.67

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

Complexity Level

Rating assigned
with outlook

NA

Cash Credit

NA

NA

NA

84

NA

CRISIL A-/Watch Developing

NA

Packing credit in foreign currency

NA

NA

NA

190

NA

CRISIL A-/Watch Developing

NA

Letter of Credit

NA

NA

NA

305

NA

CRISIL A2+/Watch Developing

NA

Proposed Term Loan

NA

NA

NA

56.85

NA

CRISIL A-/Watch Developing

NA

Term Loan

NA

NA

Mar-28

477.15

NA

CRISIL A-/Watch Developing

NA

Working Capital Demand Loan

NA

NA

NA

371

NA

CRISIL A-/Watch Developing

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Chemsynth Labarotories Private Limited

100%

Subsidiary

Sequent Prenems Private Limited

100%

Subsidiary

Shasun USA INC

100%

Subsidiary

Solara Active Pharma Sciences Limited

100%

Parent

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 1179.0 CRISIL A-/Watch Developing   -- 07-10-21 CRISIL A-/Positive 24-09-20 CRISIL A2+ / CRISIL A-/Stable 14-08-19 CRISIL BBB+/Positive / CRISIL A2 CRISIL BBB+/Stable / CRISIL A2
      --   --   --   -- 01-02-19 CRISIL BBB+/Stable / CRISIL A2 --
Non-Fund Based Facilities ST 305.0 CRISIL A2+/Watch Developing   -- 07-10-21 CRISIL A2+ 24-09-20 CRISIL A2+ 14-08-19 CRISIL A2 CRISIL A2
      --   --   --   -- 01-02-19 CRISIL A2 --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 84 HDFC Bank Limited CRISIL A-/Watch Developing
Letter of Credit 30 IDFC FIRST Bank Limited CRISIL A2+/Watch Developing
Letter of Credit 85 HDFC Bank Limited CRISIL A2+/Watch Developing
Letter of Credit 50 ICICI Bank Limited CRISIL A2+/Watch Developing
Letter of Credit 90 RBL Bank Limited CRISIL A2+/Watch Developing
Letter of Credit 50 IndusInd Bank Limited CRISIL A2+/Watch Developing
Packing Credit in Foreign Currency 50 IDFC FIRST Bank Limited CRISIL A-/Watch Developing
Packing Credit in Foreign Currency 70 RBL Bank Limited CRISIL A-/Watch Developing
Packing Credit in Foreign Currency 45 IndusInd Bank Limited CRISIL A-/Watch Developing
Packing Credit in Foreign Currency 25 Kotak Mahindra Bank Limited CRISIL A-/Watch Developing
Proposed Term Loan 56.85 Not Applicable CRISIL A-/Watch Developing
Term Loan 27.15 IndusInd Bank Limited CRISIL A-/Watch Developing
Term Loan 80 Kotak Mahindra Bank Limited CRISIL A-/Watch Developing
Term Loan 38.61 IDFC FIRST Bank Limited CRISIL A-/Watch Developing
Term Loan 110 HDFC Bank Limited CRISIL A-/Watch Developing
Term Loan 170 ICICI Bank Limited CRISIL A-/Watch Developing
Term Loan 51.39 IndusInd Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 70 IDFC FIRST Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 126 HDFC Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 50 ICICI Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 50 RBL Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 30 IndusInd Bank Limited CRISIL A-/Watch Developing
Working Capital Demand Loan 45 Kotak Mahindra Bank Limited CRISIL A-/Watch Developing

This Annexure has been updated on 17-Feb-2022 in line with the lender-wise facility details as on 7-Oct-2021 received from the rated entity

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for the Pharmaceutical Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

Media Relations
Analytical Contacts
Customer Service Helpdesk

Pankaj Rawat
Media Relations
CRISIL Limited
B: +91 22 3342 3000
pankaj.rawat@crisil.com

Hiral Jani Vasani
Media Relations
CRISIL Limited
B: +91 22 3342 3000
hiral.vasani@crisil.com

Rutuja Gaikwad 
Media Relations
CRISIL Limited
B: +91 22 3342 3000
Rutuja.Gaikwad@ext-crisil.com


Himank Sharma
Director
CRISIL Ratings Limited
D:+91 124 672 2152
Himank.Sharma@crisil.com


Jayashree Nandakumar
Associate Director
CRISIL Ratings Limited
D:+91 40 4032 8218
Jayashree.Nandakumar@crisil.com


Kirtana Sainath
Manager
CRISIL Ratings Limited
D:+91 44 6656 3614
Kirtana.Sainath@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.


About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)

CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
 
CRISIL Ratings Limited ('CRISIL Ratings') is a wholly-owned subsidiary of CRISIL Limited ('CRISIL'). CRISIL Ratings Limited is registered in India as a credit rating agency with the Securities and Exchange Board of India ("SEBI").
 
For more information, visit www.crisilratings.com 

 



About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

CRISIL is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.


For more information, visit www.crisil.com

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK


CRISIL PRIVACY NOTICE
 
CRISIL respects your privacy. We may use your contact information, such as your name, address and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL’s privacy policy please visit www.crisil.com.



DISCLAIMER

This disclaimer is part of and applies to each credit rating report and/or credit rating rationale (‘report’) that is provided by CRISIL Ratings Limited (‘CRISIL Ratings’). To avoid doubt, the term ‘report’ includes the information, ratings and other content forming part of the report. The report is intended for the jurisdiction of India only. This report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the report is to be construed as CRISIL Ratings providing or intending to provide any services in jurisdictions where CRISIL Ratings does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this report does not create a client relationship between CRISIL Ratings and the user.

We are not aware that any user intends to rely on the report or of the manner in which a user intends to use the report. In preparing our report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the report is not intended to and does not constitute an investment advice. The report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind to enter into any deal or transaction with the entity to which the report pertains. The report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Ratings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold or sell any securities/instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL Ratings assumes no obligation to update its opinions following publication in any form or format although CRISIL Ratings may disseminate its opinions and analysis. The rating contained in the report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the report should rely on their own judgment and take their own professional advice before acting on the report in any way. CRISIL Ratings or its associates may have other commercial transactions with the entity to which the report pertains.

Neither CRISIL Ratings nor its affiliates, third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively, ‘CRISIL Ratings Parties’) guarantee the accuracy, completeness or adequacy of the report, and no CRISIL Ratings Party shall have any liability for any errors, omissions or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the report. EACH CRISIL RATINGS PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Ratings Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. Public ratings and analysis by CRISIL Ratings, as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any), are made available on its website, www.crisilratings.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about ratings by CRISIL Ratings are available here: www.crisilratings.com.

CRISIL Ratings and its affiliates do not act as a fiduciary. While CRISIL Ratings has obtained information from sources it believes to be reliable, CRISIL Ratings does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and/or relies on in its reports. CRISIL Ratings has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL Ratings has in place a ratings code of conduct and policies for managing conflict of interest. For details please refer to:
https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html.

Rating criteria by CRISIL Ratings are generally available without charge to the public on the CRISIL Ratings public website, www.crisilratings.com. For latest rating information on any instrument of any company rated by CRISIL Ratings, you may contact the CRISIL Ratings desk at crisilratingdesk@crisil.com, or at (0091) 1800 267 1301.

This report should not be reproduced or redistributed to any other person or in any form without prior written consent from CRISIL Ratings.

All rights reserved @ CRISIL Ratings Limited. CRISIL Ratings is a wholly owned subsidiary of CRISIL Limited.

 

 

CRISIL Ratings uses the prefix ‘PP-MLD’ for the ratings of principal-protected market-linked debentures (PPMLD) with effect from November 1, 2011, to comply with the SEBI circular, "Guidelines for Issue and Listing of Structured Products/Market Linked Debentures". The revision in rating symbols for PPMLDs should not be construed as a change in the rating of the subject instrument. For details on CRISIL Ratings' use of 'PP-MLD' please refer to the notes to Rating scale for Debt Instruments and Structured Finance Instruments at the following link: https://www.crisil.com/en/home/our-businesses/ratings/credit-ratings-scale.html