Rating Rationale
August 04, 2020 | Mumbai
Sun Pharmaceutical Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.176 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.4000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL 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 Sun Pharma's leadership position 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.
 
CRISIL expects the overall revenue growth to sustain at about 7-8% over the medium term backed by the company's leadership position in the domestic market, strong product pipeline in the regulated markets and a healthy market position in the rest of the world. As the company operates in the essential products segment, operations are not significantly impacted by the on-going national lockdown following the Covid-19 outbreak. For fiscal 2020, revenue grew over 13% fiscal-on-fiscal across geographies - particularly India and emerging markets. However, the US segment degrew by 1% because of the competitive environment. Pricing pressure has moderated in the US but the growth outlook will be contingent upon successful launch of generic products; the company had an abbreviated new drug application (ANDA) pipeline of 95 products as on June 30, 2020. Further, the growth will be supported by specialty products; out of the 10 products in this pipeline, 8 were launched until fiscal 2020, including Ilumya and Cequa. Ramp-up in sales of recently launched specialty products will be a key driver for growth in the US market. The operating margin was about 21% for fiscal 2020, and is likely to be sustained at 20-21% 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 company announced that Taro Pharmaceuticals U.S.A., Inc. ('Taro', a wholly owned subsidiary of Taro Pharmaceutical Industries Ltd) has resolved all cases involving Taro in connection with the multi-year investigations by the Department of Justice, Antitrust Division and Civil Division ('DOJ') into the U.S. generic pharmaceutical industry. DOJ will file an information for conduct that took place between 2013 and 2015. If the company adheres to the terms of the agreement, including the payment of USD 205.7 million, the DOJ will dismiss the information at the end of a three-year period. Taro has also agreed to make additional payment of USD 213 million to resolve all claims related to federal healthcare programs. Sun Pharma's strong liquid surplus of about Rs. 15,800 crore (including liquid surplus at Taro of ~12,000 crore) as on March 31, 2020 will support these payouts.
 
Additionally, the outcome of the Securities and Exchange Board of India forensic audit on financial statements of fiscals 2016, 2017 and 2018 is awaited. CRISIL will continue to monitor developments in this regard, and remain in discussion with the management. Any significant observations or findings, including from regulators, as well as significant settlement payouts will remain the key rating monitorables.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Sun Pharma and its 62 subsidiaries, together known as Sun Pharma, as the companies have considerable operational and financial linkages. For joint ventures (JVs) and associates, CRISIL follows a moderate integration approach; specifically, CRISIL factors in share of profit from JVs, and share of any incremental investments required by JVs.  Furthermore, 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 of 8.2% as on June 30, 2020 (Source: All India Organisation of Chemists and Druggists [AIOCD]). Leading position in the chronic segment is backed by specialisation in technically complex products and large product portfolio. The company has 31 of the top 300 brands 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 market.
 
Its key therapeutic area in domestic formulation are cardiology, neurology and gastroenterology, anti-infectives, anti-diabetic accounting for 18%, 17%,12%, 10% and 9% of revenue respectively, as per AIOCD AWACS data  for 12 months to March 2020. The company continues to enjoy a dominant position in these segments. During this period, domestic revenue grew at a healthy rate of 15% because of change in the distribution model. In last quarter of fiscal 2019, Sun Pharma terminated its domestic distribution business from Aditya MediSales and transitioned it to its own 100% subsidiary, resulting in this one-time adjustment of Rs. 1,085 crores from revenues in Q4 of fiscal 2019. Going forward we expect the growth rate in the domestic business to normalise and remain in the range of 7-8% over the medium term.
 
* Strong presence in the US: The US, which contributed 33% of revenue in fiscal 2020, is among the key geographies. The company has a robust product pipeline - as on June 30, 2020, it had 491 approved ANDAs and 95 pending approval. It also had 55 approved NDAs while 6 NDAs await 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 market and rest-of-the world: Sun Pharma is one of the largest Indian companies in emerging markets with presence in about 80 markets and manufacturing facilities in about 7 countries. Revenues from emerging markets account for about 17% of overall consolidated revenues with key contributors being Russia, Romania, South Africa, Brazil and Mexico. With about 14% 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, and Australia, supported by a basket of products including injectables and hospital products as well as products for retail market.
 
* Strong financial risk profile: The debt protection metrics are healthy and cash flow is strong. The capital structure is comfortable, with adjusted gearing estimated at less than 0.3 time as on March 31, 2020, and expected at a similar level over the medium term. Net cash accrual to total debt and interest coverage ratios are estimated at 0.7 time and 15 times, respectively, for fiscal 2020. As the large cash accrual will be sufficient to meet capital expenditure (capex) and, to some extent, working capital requirement, the capital structure is expected to remain comfortable over the medium term. The company has undertaken a share buyback of equity shares amounting to Rs 1700 crore which is expected to be completed within a period of six months starting from last week of March 2020. Large cash flows and sizeable cash and liquid investments of about Rs 15,800 crore as on March 31, 2020 (on a consolidated basis) lend strong financial flexibility; part of liquid surplus will be used for USD 418.7 million antitrust settlement. 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. These risks were manifested with the USFDA identifying certain current good manufacturing practices (CGMP) deviations at the company's Halol facility during its inspection in September 2014, which led to the regulatory body issuing a warning letter in December 2015, which was subsequently resolved in June 2018.  Further in December 2019, the facility at Halol was audited by US FDA and received eight observations under form 483. The audit was later classified as Official Action Indicated (OAI) by USFDA. US supplies from Halol accounts for about 3-4% of the total revenues. Furthermore, 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 US FDA. The import alert at the Mohali plant was lifted in March 2017 and the company continues to receive product approvals from this facility for the US market. Resolution of pending regulatory issues and sustained compliance will remain key monitorable.

* Intensifying competition: Sun Pharma faces intense competition in the generics market because of aggressive defence tactics by innovator companies through introduction of authorised generics, customer consolidation, faster pace of ANDA approvals by US FDA, 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 planned a pipeline of complex generics and speciality products. Successful launch of these products will be critical for the company to mitigate the pricing pressures observed in its existing portfolio of products.
Liquidity Superior

Expected cash accrual of over Rs 6,000 crore per fiscal will be more than sufficient to repay debt of about Rs 1,100 crore and Rs 800 crore in fiscals 2020 and 2021, respectively. Liquidity is also supported by liquid surpluses of about Rs 15,800 crore as of March 31, 2020.
 
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 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 a 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:
* Significant and sustained decline in revenue by about 15% or operating profitability to below 15%
* Significant increase in leverage to 0.4-0.6 times, or weakening of liquidity following larger-than expected acquisition or capital expenditure
* 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 few acquisitions in the generics business which has helped it to broaden its global product basket and to enhance its presence in key geographies.
 
For fiscal 2020, company reported operating income of Rs 32,838 crore and profit after tax (PAT) of Rs 4,172 crore as against Rs 29,066 crore and 3,208 crore respectively, in the corresponding period of previous fiscal.
 
For the first three months of fiscal 2021, company reported operating income of Rs. 7,585 crore and loss after tax of Rs. 2,426 crore (primarily due to onetime provision of settlement expenses of about Rs 3600 crore towards US antitrust law suit) as against Rs 8,374 crore and PAT of 1,497 crore respectively, for the corresponding period of previous fiscal.
 

Key Financial Indicators
As on / for the period ended March 31   2019 2018
Revenue Rs Crore 28,686 26,574
Adjusted profit after tax (PAT)* Rs Crore 3,208 1,263
Adjusted PAT Margin* % 11 4.8
Adjusted Debt/Adjusted Networth Times 0.29 0.29
Net cash accrual to adjusted debt Times 0.34 0.30
*Adjusted for goodwill and intangible amortisation

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity
Date		 Issue Size (Rs Cr) 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
No. Name of the company Extent of consolidation Rationale for consolidation
1 Sun Pharma France (Formerly known as Ranbaxy Pharmacie Generiques) Fully consolidated Subsidiary
2 Zenotech Laboratories Limited (consolidated) Moderately consolidated Subsidiary
3 Ranbaxy (U.K.) Limited Fully consolidated Subsidiary
4 Ranbaxy Holdings (U.K.) Limited Fully consolidated Subsidiary
5 Ranbaxy lreland Limited Fully consolidated Subsidiary
6 Basics GmbH Fully consolidated Subsidiary
7 Sun Pharma Laboratorios S.L.U (Formerly known as Laboratorios Ranbaxy, S.L.U.) Fully consolidated Subsidiary
8 Ranbaxy Italia S.P.A. Fully consolidated Subsidiary
9 Sun Pharma (Netherlands) B.V. Fully consolidated Subsidiary
10 Ranbaxy (Poland) SP. Z O.O. Fully consolidated Subsidiary
11 AO Ranbaxy Fully consolidated Subsidiary
12 "Ranbaxy Pharmaceuticals Ukraine" LLC Fully consolidated Subsidiary
13 Terapia SA Fully consolidated Subsidiary
14 Ranbaxy South Africa (Pty) Ltd (consolidated) Fully consolidated Subsidiary
15 Ranbaxy Nigeria Limited Fully consolidated Subsidiary
16 Ranbaxy Pharmaceuticals (Pty) Ltd Fully consolidated Subsidiary
17 Sun Pharmaceuticals Morocco LLC Fully consolidated Subsidiary
18 Sun Pharma Egypt Limited LLC Fully consolidated Subsidiary
19 Rexcel Egypt LLC Fully consolidated Subsidiary
20 Ranbaxy (Malaysia) SDN. BHD. Fully consolidated Subsidiary
21 Sun Pharma ANZ Pty Ltd Fully consolidated Subsidiary
22 Sun Pharmaceuticals Holdings USA, Inc. (consolidated) Fully consolidated Subsidiary
23 Ranbaxy Farmaceutica Ltda. Fully consolidated Subsidiary
24 Sun Pharmaceutical Peru S.A.C. Fully consolidated Subsidiary
25 Sun Pharma Canada Inc. Fully consolidated Subsidiary
26 Ranbaxy (Thailand) Co., Ltd. Fully consolidated Subsidiary
27 JSC Biosintez Fully consolidated Subsidiary
28 Faststone Mercantile Company Private Limited Fully consolidated Subsidiary
29 Green Eco Development Centre Limited Fully consolidated Subsidiary
30 Neetnav Real Estate Private Limited Fully consolidated Subsidiary
31 Realstone Multitrade Private Limited Fully consolidated Subsidiary
32 Skisen Labs Private Limited Fully consolidated Subsidiary
33 Softdeal Trading Company Private Ltd Fully consolidated Subsidiary
34 Universal Enterprises Private Limited Fully consolidated Subsidiary
35 Sun Pharmaceutical (Bangladesh) Limited Moderately consolidated Subsidiary
36 Sun Pharmaceuticals Germany GmbH Fully consolidated Subsidiary
37 Sun Pharmaceuticals France Fully consolidated Subsidiary
38 Sun Pharma Switzerland Ltd. Fully consolidated Subsidiary
39 Sun Pharmaceutical Industries (Europe) B.V. Fully consolidated Subsidiary
40 OOO "Sun Pharmaceutical Industries" Limited  Fully consolidated Subsidiary
41 Alkaloida Chemical Company Zrt. Fully consolidated Subsidiary
42 Sun Pharmaceuticals SA (Pty) Ltd Fully consolidated Subsidiary
43 Sun Pharma Holdings Fully consolidated Subsidiary
44 Aditya Acquisition Company Ltd. Fully consolidated Subsidiary
45 Taro Pharmaceutical Industries Ltd (TARO) (consolidated) Moderately consolidated Subsidiary
46 Sun Pharma Global FZE Fully consolidated Subsidiary
47 Sun Laboratories FZE Fully consolidated Subsidiary
48 Sun Pharma East Africa Limited Fully consolidated Subsidiary
49 Sun Pharma Philippines, Inc. Fully consolidated Subsidiary
50 Sun Pharma Japan Ltd. Fully consolidated Subsidiary
51 Sun Pharmaceuticals Korea Ltd. Fully consolidated Subsidiary
52 Sun Pharmaceutical Industries (Australia) Pty Limited Fully consolidated Subsidiary
53 Sun Farmaceutica do Brasil Ltda. Fully consolidated Subsidiary
54 Sun Pharmaceutical Industries S.A.C. Fully consolidated Subsidiary
55 SPIL De Mexico S.A. DE C.V. Fully consolidated Subsidiary
56 Sun Pharma De Mexico S.A. DE C.V. Fully consolidated Subsidiary
57 Sun Pharma De Venezuela, C.A. Fully consolidated Subsidiary
58 Sun Pharma Laboratories Limited Fully consolidated Subsidiary
59 Sun Pharmaceutical Medicare Limited Fully consolidated Subsidiary
60 Caraco Pharmaceuticals Private Limited Fully consolidated Subsidiary
61 Sun Pharma Distributors Limited Fully consolidated Subsidiary
62 Realstone Infra Ltd Fully consolidated Subsidiary
63 Artes Biotechnology GmbH Moderately consolidated Joint Venture
64 Medinstill LLC Moderately consolidated Associate
65 Gerieric Solar Power LLP Moderately consolidated Associate
66 Trumpcard Advisors and Finvest LLP Moderately consolidated Associate
67 Tarsius Pharma Ltd. Moderately consolidated Associate
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  4000.00  CRISIL A1+  06-05-20  CRISIL A1+  13-09-19  CRISIL A1+  25-10-18  CRISIL A1+  29-09-17  CRISIL A1+  -- 
            24-01-19  CRISIL A1+  19-03-18  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  71.00  CRISIL AAA/Stable  06-05-20  CRISIL AAA/Stable  13-09-19  CRISIL AAA/Stable  25-10-18  CRISIL AAA/Stable  29-09-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
            24-01-19  CRISIL AAA/Stable  19-03-18  CRISIL AAA/Stable  24-08-17  CRISIL AAA/Stable   
                    03-02-17  CRISIL AAA/Stable   
Non Fund-based Bank Facilities  LT/ST  105.00  CRISIL A1+  06-05-20  CRISIL A1+  13-09-19  CRISIL A1+  25-10-18  CRISIL A1+  29-09-17  CRISIL A1+  CRISIL A1+ 
            24-01-19  CRISIL A1+  19-03-18  CRISIL A1+  24-08-17  CRISIL A1+   
                    03-02-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee$ 15 CRISIL A1+ Bank Guarantee$ 15 CRISIL A1+
Cash Credit^@ 62 CRISIL AAA/Stable Cash Credit^@ 62 CRISIL AAA/Stable
Letter of Credit# 75.5 CRISIL A1+ Letter of Credit# 75.5 CRISIL A1+
Proposed Bank Guarantee 11 CRISIL A1+ Proposed Bank Guarantee 11 CRISIL A1+
Proposed Cash Credit Limit 9 CRISIL AAA/Stable Proposed Cash Credit Limit 9 CRISIL AAA/Stable
Proposed Letter of Credit 3.5 CRISIL A1+ Proposed Letter of Credit 3.5 CRISIL A1+
Total 176 -- Total 176 --
^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
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 Consolidation
CRISILs Criteria for rating short term debt

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