Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Sun Pharmaceutical Industries Limited (Sun Pharma).

The ratings continue to reflect the leadership position of Sun Pharma in the domestic formulations segment, strong presence in the regulated generics markets, an expanding share in the rest-of-the-world (excluding India and US) markets, and a robust financial risk profile. These strengths are partially offset by exposure to intense pricing pressure and regulatory risks in the domestic and regulated markets.

Being a supplier of essential products, the company continued to manufacture and supply pharmaceutical products in fiscal 2021.  Though nationwide lockdown and subsequently lower doctor visits and elective surgeries had lowered demand for pharmaceutical products in the first half of last fiscal, gradual recovery was witnessed in the second half with no lockdowns.  For 2021, revenue grew 3% fiscal-on-fiscal across geographies – particularly India and emerging markets. However, the US segment de-grew 4% because of the competitive environment, pricing pressure and contribution from a one-time special business in US in the previous year. The growth in the US market will be contingent upon the successful launch of generic products; the company had an abbreviated new drug application (ANDA) pipeline of 86 products as on June 30, 2021. Further, ramp-up in sales of recently launched specialty products such as Ilumya, Cequa will be a key driver for growth in the US market. The operating margin, at 25.6% for fiscal 2021, is likely to be sustained at 23-34% over the medium term. The margin is, however, constrained due to pricing pressure in the US market, marketing expenses related to specialty products wherein the commensurate returns will accrue after a lag, and exposure to foreign currency risks.

The financial risk profile continues to be strong marked by high tangible networth of Rs 40,266 crore and sizeable liquid surplus of Rs 14,950 crore as on March 31, 2021. Capital expenditure (Capex) is expected to be Rs 1500-2000 crore for fiscal 2022, including routine maintenance. The capex and working capital requirements are likely to be funded entirely through internal accrual and liquid surplus and hence, financial risk profile is expected to remain strong over the medium term.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Sun Pharma and its 102 subsidiaries, JVs, associates and their subsidiary, together known as Sun Pharma, as the companies have considerable operational and financial linkages. For joint ventures (JVs) and associates, a moderate integration approach is followed; specifically, CRISIL Ratings factors in the share of profit from JVs, as also any incremental investments required by them.  Further, intangibles (such as brands and trademarks) and goodwill on consolidation have been amortised over five years.

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

• Leadership position in domestic formulations: Sun Pharma is the market leader in the domestic formulations segment, with a market share over 8% as on June 30, 2021 (Source: All India Organisation of Chemists and Druggists [AIOCD]). Leading position in the chronic segment is backed by specialisation in technically complex products, strong brand equity and large product portfolio. Twenty eight of the company’s brands are in the top 300 in the domestic market. It ranks among the top 10 consumer healthcare companies in India and enjoys strong brand equity for certain key products such as Revital (vitamin and mineral supplement) and Volini (pain reliever). These brands give a competitive edge and also create a foundation for establishing a global over the counter (OTC) business. Sun Pharma also markets its OTC products in over 20 international markets.

 

Its key therapeutic areas in domestic formulations are cardiology, neurology and gastroenterology, anti-infectives, anti-diabetic accounting for 18%, 17%,12%, 9% and 9% of revenue, respectively, as per AIOCD AWACS data  for the 12 months through March 2021. The company continues to enjoy a dominant position in these segments. During this period, domestic revenue grew at a healthy 7% driven by the chronic segment. The growth rate in the domestic business is expected to improve to 10-12% over the medium term.

 

• Strong presence in the US: The US, which contributed 30% of revenue in fiscal 2021, is among the key geographies. The company has a robust product pipeline – as on June 30, 2021, it had 505 approved ANDAs and 86 pending approval. It also had 53 approved NDAs while 13 NDAs await the United States Food and Drug Administration (USFDA) approval. After sustained research and development on the specialty pipeline, key products such as Ilumya and Cequa were commercialised in the US. However, the US segment’s growth is expected to be impacted due to intense pricing pressure prevalent in the generics segment. The company continues to be among the top ten generic pharmaceutical companies in the US market. The position in other regulated markets of Europe, Japan, Canada and Australia is supported by its strength in the generics, branded, and OTC segments.

 

• Increasing presence in emerging markets and rest-of-the world: Sun Pharma is one of the largest Indian companies in emerging markets with presence in about 80 countries and manufacturing facilities in seven. Revenue from emerging markets account for about 18% of overall consolidated revenue with key contributors being Russia, Romania, South Africa, Brazil and Mexico. With about 15% revenue from the rest of the world (excluding India, US and emerging markets), Sun Pharma has presence in all major markets of Western Europe, Canada, Japan, Israel and Australia, supported by a basket of products including injectables and hospital products as well as products for the retail market. 

 

• Strong financial risk profile: Adjusted gearing, healthy at 0.1 time as on March 31, 2021, is expected at a similar level over the medium term. Debt protection metrics are healthy with estimated net cash accrual to total debt and interest coverage ratios of 0.72 time and 64.33 times, respectively, for fiscal 2021. As the large cash accrual will be sufficient to meet capital expenditure (capex) and, to some extent, working capital requirement, capital structure is expected to remain comfortable over the medium term. Large cash flows and sizeable cash and liquid investments of about Rs 14,950 crore as on March 31, 2021 (on a consolidated basis) lend strong financial flexibility. Any significant payouts towards legal or regulatory claim settlements or large acquisition will remain a key monitorable

 

Weaknesses

• Exposure to regulatory risks: Sun Pharma is exposed to regulatory risks with instances of adverse observations for its plants. In December 2019, the facility at Halol was audited by USFDA and received eight observations under form 483. The audit was later classified as Official Action Indicated (OAI) by USFDA, implying that new US approvals from the facility will be on hold till  it gets re-inspected, while already approved products will not be impacted. US supplies from Halol accounts for about 3-4% of the total revenue. Further, three facilities (Toansa in Punjab; Dewas in Madhya Pradesh; and Poanta Sahib in Himachal Pradesh) remain under import alert and subject to certain clauses of a consent decree with USFDA. Resolution of pending regulatory issues and sustained compliance will remain key monitorable.

 

• Intensifying competition: Sun Pharma faces intense competition in the US generics market because of aggressive defence tactics by innovator companies through introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by USFDA, and healthcare cost containment measures by the US government. Also, players in the US and Europe are vulnerable to pricing pressure on account of entry of many cost-competitive Indian players. Increasing competition in international markets and research and development cost are likely to constrain the operating margin.

 

Nevertheless, the company has a pipeline of complex generics and speciality products. The successful launch of these products will be critical for the company to mitigate the pricing pressures observed in its existing portfolio.

Liquidity: Superior

CRISIL Ratings expects annual cash accrual of over Rs 5,000 crore will be more than sufficient to repay debt of about Rs 181 crore each in fiscals 2022 and 2023. Liquidity is also supported by liquid surpluses of about Rs 14,950 crore as on March 31, 2021.

 

Organic capex is expected to remain moderate at Rs 1,500 crore, which is likely to be funded through a mix of internal cash accrual and liquid surpluses.

Outlook: Stable

CRISIL Ratings believes Sun Pharma will maintain its healthy revenue growth in the Indian formulations and international generics markets over the medium term, driven by a strong market position, diverse geographical base, and comfortable product pipeline. Healthy revenue growth and strong profitability will ensure that financial risk profile remains robust, supported by large cash accrual and substantial cash surplus.

Rating Sensitivity Factors

Downward Factors:

• Decline in revenue by about 15% or operating profitability to below 15%
• Significant increase in leverage to 0.4-0.6 time, or weakening of liquidity following larger-than expected acquisition or capex
• Any adverse regulatory outcome

About the Company

Promoted by Mr Dilip Shanghvi, Sun Pharma was formed as a partnership firm in 1982 in Vapi, Gujarat, to manufacture drugs. It was reconstituted as a limited company in 1993.

 

Sun Pharma is one of the largest Indian pharmaceutical companies, with a leading position in the high growth chronic segments. Its product mix comprises both formulations and bulk drugs, with formulations accounting for nearly 95% of revenue. To focus on specialty segments, the company has undertaken product acquisitions, which has helped it to establish its global specialty business. The company has, in the past, undertaken a few acquisitions in the generics business, which has helped it to broaden its global product basket and enhance its presence in key geographies.

 

For the first three months of fiscal 2022, company reported operating income of Rs. 9,719 crore and profit  after tax of Rs. 1,404 crore as against Rs 7,585 crore and PAT of Rs 2,426 crore respectively, for the corresponding period of previous fiscal.

Key Financial Indicators

As on / for the period ended March 31	Unit	2021	2020
Revenue	Rs crore	33,569	32,960
Adjusted profit after tax (PAT)*	Rs crore	1,888	3,342
Adjusted PAT margin*	%	5.6	10.1
Adjusted debt/Adjusted networth	Times	0.10	0.20
Net cash accrual to adjusted debt	Times	0.72	0.57

*Adjusted for goodwill and intangible amortisation.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Cash credit^@	NA	NA	NA	62.00	NA	CRISIL AAA/Stable
NA	Letter of credit#	NA	NA	NA	75.50	NA	CRISIL A1+
NA	Bank guarantee$	NA	NA	NA	15.00	NA	CRISIL A1+
NA	Proposed cash credit limit	NA	NA	NA	9.00	NA	CRISIL AAA/Stable
NA	Proposed letter of credit	NA	NA	NA	3.50	NA	CRISIL A1+
NA	Proposed bank guarantee	NA	NA	NA	11.00	NA	CRISIL A1+
NA	Commercial paper	NA	NA	7-365 days	4000.00	Simple	CRISIL A1+

^Fully interchangeable with working capital demand loan

@All facilities are interchangeable with non-fund based limits

#Fully interchangeable with bank guarantee

$Fully interchangeable with letter of credit

Annexure - List of Entities Consolidated

	Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
1	Green Eco Development Centre Limited	Full	Subsidiary
2	Sun Pharmaceutical (Bangladesh) Limited	Full	Subsidiary
3	Sun Pharma De Mexico S.A. DE C.V	Full	Subsidiary
4	SPIL De Mexico S.A. DE C.V	Full	Subsidiary
5	Sun Pharmaceutical Peru S.A.C.	Full	Subsidiary
6	OOO “Sun Pharmaceutical Industries” Limited	Full	Subsidiary
7	Sun Pharma De Venezuela, C.A.	Full	Subsidiary
8	Sun Pharma Laboratories Limited	Full	Subsidiary
9	Faststone Mercantile Company Private Limited	Full	Subsidiary
10	Neetnav Real Estate Private Limited India	Full	Subsidiary
11	Realstone Multitrade Private Limited	Full	Subsidiary
12	Skisen Labs Private Limited	Full	Subsidiary
13	Sun Pharma Holdings	Full	Subsidiary
14	Softdeal Pharmaceuticals Private Limited (Formerly known as Softdeal Trading Company Private Limited)	Full	Subsidiary
15	Sun Pharma (Netherlands) B.V.	Full	Subsidiary
16	Foundation for Disease Elimination and Control of India	Full	Subsidiary
17	Zenotech Laboratories Limited	Full	Subsidiary
18	Sun Farmaceutica do Brasil Ltda.	Full	Subsidiary
19	Sun Pharma France (Formerly Known as Ranbaxy Pharmacie Generiques)	Full	Subsidiary
20	Sun Pharmaceutical Industries, Inc.	Full	Subsidiary
21	Ranbaxy (Malaysia) SDN. BHD.	Full	Subsidiary
22	Ranbaxy Nigeria Limited	Full	Subsidiary
23	Chattem Chemicals Inc.	Full	Subsidiary
24	The Taro Development Corporation	Full	Subsidiary
25	Alkaloida Chemical Company Zrt.	Full	Subsidiary
26	Sun Pharmaceutical Industries (Australia) Pty Limited	Full	Subsidiary
27	Aditya Acquisition Company Ltd.	Full	Subsidiary
28	Sun Pharmaceutical Industries (Europe) B.V.	Full	Subsidiary
29	Sun Pharmaceuticals Germany GmbH	Full	Subsidiary
30	Sun Pharma Global FZE	Full	Subsidiary
31	Sun Pharmaceuticals SA (Pty) Ltd	Full	Subsidiary
32	Sun Pharma Philippines, Inc.	Full	Subsidiary
33	Caraco Pharmaceuticals Private Limited	Full	Subsidiary
34	Sun Pharma Japan Ltd.	Full	Subsidiary
35	Sun Laboratories FZE	Full	Subsidiary
36	Taro Pharmaceutical Industries Ltd. (Taro)	Full	Subsidiary
37	Taro Pharmaceuticals Inc.	Full	Subsidiary
38	Taro Pharmaceuticals U.S.A., Inc.	Full	Subsidiary
39	Taro Pharmaceuticals North America, Inc.	Full	Subsidiary
40	Taro Pharmaceuticals Europe B.V	Full	Subsidiary
41	Taro International Ltd.	Full	Subsidiary
42	3 Skyline LLC	Full	Subsidiary
43	One Commerce Drive LLC	Full	Subsidiary
44	Taro Pharmaceutical Laboratories Inc.	Full	Subsidiary
45	Dusa Pharmaceuticals, Inc.	Full	Subsidiary
46	2 Independence Way LLC	Full	Subsidiary
47	Universal Enterprises Private Limited	Full	Subsidiary
48	Sun Pharma Switzerland Ltd.	Full	Subsidiary
49	Sun Pharma East Africa Limited	Full	Subsidiary
50	PI Real Estate Ventures, LLC	Full	Subsidiary
51	Sun Pharma ANZ Pty Ltd	Full	Subsidiary
52	Ranbaxy Farmaceutica Ltda.	Full	Subsidiary
53	Sun Pharma Canada Inc.	Full	Subsidiary
54	Sun Pharma Egypt Limited LLC	Full	Subsidiary
55	Rexcel Egypt LLC	Full	Subsidiary
56	Basics GmbH	Full	Subsidiary
57	Ranbaxy Ireland Limited	Full	Subsidiary
58	Sun Pharma Italia srl (Formerly known as Ranbaxy Italia S.P.A.)	Full	Subsidiary
59	Sun Pharmaceutical Industries S.A.C.	Full	Subsidiary
60	Ranbaxy (Poland) SP. Z O.O.	Full	Subsidiary
61	Terapia SA	Full	Subsidiary
62	AO Ranbaxy	Full	Subsidiary
63	Ranbaxy South Africa (Pty) Ltd	Full	Subsidiary
64	Ranbaxy Pharmaceuticals (Pty) Ltd	Full	Subsidiary
65	Sonke Pharmaceuticals Proprietary Limited	Full	Subsidiary
66	Sun Pharma Laboratorios,S.L.U. (Formerly known as Laboratorios Ranbaxy, S.L.U.)	Full	Subsidiary
67	Ranbaxy (U.K.) Limited	Full	Subsidiary
68	Ranbaxy Holdings (U.K.) Limited	Full	Subsidiary
69	Ranbaxy Inc.	Full	Subsidiary
70	Ranbaxy (Thailand) Co., Ltd.	Full	Subsidiary
71	Ohm Laboratories, Inc.	Full	Subsidiary
72	Ranbaxy Signature LLC	Full	Subsidiary
73	Sun Pharmaceuticals Morocco LLC	Full	Subsidiary
74	“Ranbaxy Pharmaceuticals Ukraine” LLC	Full	Subsidiary
75	Sun Pharmaceutical Medicare Limited	Full	Subsidiary
76	JSC Biosintez	Full	Subsidiary
77	Sun Pharmaceuticals Holdings USA, Inc.	Full	Subsidiary
78	Zenotech Inc	Full	Subsidiary
79	Zenotech Farmaceutica Do Brasil Ltda	Moderate	Subsidiary
80	Kayaku Co., Ltd.	Full	Subsidiary
81	Sun Pharma Distributors Limited	Full	Subsidiary
82	Realstone Infra Limited	Full	Subsidiary
83	Sun Pharmaceuticals (EZ) Limited	Full	Subsidiary
84	Sun Pharma (Shanghai) Limited	Full	Subsidiary
85	Artes Biotechnology GmbH	Moderate	Joint Venture Entity
86	Medinstill LLC	Moderate	Associates
87	Generic Solar Power LLP	Moderate	Associates
88	Trumpcard Advisors and Finvest LLP	Moderate	Associates
89	Tarsier Pharma Ltd (Formerly known as Tarsius Pharma Ltd.)	Moderate	Associates
90	WRS Bioproducts Pty Ltd.	Moderate	Associates
91	Composite Power Generation LLP	Moderate	Subsidiary of Associates
92	Vintage Power Generation LLP	Moderate	Subsidiary of Associates
93	Vento Power Generation LLP	Moderate	Subsidiary of Associates
94	HRE LLC	Moderate	Subsidiary of Associates
95	HRE II LLC	Moderate	Subsidiary of Associates
96	HRE III LLC	Moderate	Subsidiary of Associates
97	Dr. Py Institute LLC	Moderate	Subsidiary of Associates
98	Medinstill Development LLC	Moderate	Subsidiary of Associates
99	ALPS LLC	Moderate	Subsidiary of Associates
100	Intact Pharmaceuticals LLC	Moderate	Subsidiary of Associates
101	Intact Media LLC (Formerly known as Intact Skin Care LLC)	Moderate	Subsidiary of Associates
102	Intact Solutions LLC	Moderate	Subsidiary of Associates