Rating Rationale
December 30, 2020 | Mumbai
USV Private limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.114 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank facilities of USV Private limited (USV).
 
The company's business risk profile remains strong, backed by its leadership position in the two key therapeutic areas of oral anti-diabetics (OAD) and cardiovascular (CVS). Operating income increased 5% in fiscal 2020 to Rs 3,218 crore led by steady growth in the domestic segment. In fiscal 2020, revenue from domestic formulations grew 4% to Rs 2,653 crore, with OAD growing 7% and CVS 13%. Though market share in OAD declined marginally to 12.6% in fiscal 2020 from 13.2% in fiscal 2019, the company remains a leading player in this segment with prescription share of 22%. The international segment declined 7% to Rs 533 crore because of the Covid-19 pandemic and is expected to grow 10-11% over the medium term led by traction from new products. In October 2019, the company launched biosimilar pegfilgrastim, which is expected to contribute significantly over the near term. However, product launches are on hold due to pending audits by the US Foods and Drugs Administration (USFDA), which have been delayed amid the pandemic.
 
Operating margin slipped to 32% in fiscal 2020 from 34% the previous fiscal because of subdued growth in the international markets. The margin improved to 47.9% for the first half of fiscal 2021 (40.5% in the corresponding period in the previous fiscal) mainly due to lower spends on marketing following the pandemic-induced restrictions. For fiscal 2021, profitability is expected to sustain at 32-33% backed by healthy revenue growth in the second half of the fiscal.
 
Debt protection metrics are expected to remain healthy as debt is negligible. Ample liquid balance of over Rs 1,500 crore (largely invested in debt mutual funds) provides significant financial cushion. However, any major acquisition will remain a key monitor able.
 
The ratings continue to reflect the company's healthy market position in the fast-growing OAD and CVS therapeutic segments, and strong financial risk profile because of high operating profitability, negligible debt, and robust liquidity. These strengths are partially offset by high product concentration in revenue, and susceptibility to any adverse impact of regulatory changes and to intense competition.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of USV and its subsidiaries, USV North America Inc, USV Europe Ltd, USV Labs Pvt Ltd; and India Pharma LLC, Juta Pharma GmbH, and Key Pharma GmbH, because of their significant operational and financial linkages. All the entities are together referred to herein as USV.
 
CRISIL has also amortised goodwill of Rs 268 crore as a result of the acquisition of the Jalra brand from Novartis India Ltd, for five years starting January 2020.

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 position in the domestic high-margin chronic therapeutic segments
The company has been a leader for over two decades in the OAD and CVS chronic therapeutic segments in India. In the OAD segment, it has a market share of around 12.6% (March 2020 IMS Moving Average Total [MAT]). The share has declined marginally because of intense competition. However, its anti-diabetic formulation, Glycomet, continues to be ranked second in the top 100 brands in the domestic pharmaceutical industry. The company acquired the Jalra brand from Novartis India Ltd in December 2019 in the OAD segment which is expected to contribute significantly to the topline. In CVS, its market share has remained steady at about 5.1% (IMS MAT March 2020); the company is ranked fourth in the segment. Led by its top brands, the operating margin was healthy at 32% in fiscal 2020.
 
* Strong financial risk profile
The consolidated networth increased to around Rs 2,750 crore as on March 31, 2020, from Rs 2,450 crore as on March 31, 2018, driven by healthy profitability and robust cash accrual. Expected cash accrual of around Rs 500 crore per fiscal should be sufficient for meeting capital expenditure (capex) and incremental working capital requirement. The company plans capex of Rs 400 crore for setting up a formulations plant in Vadodara, Gujarat, which is likely to get completed by December 2021. The capex is being funded entirely through the healthy liquid surplus.
 
Weaknesses:
* Product concentration in revenue
Around 80% of domestic revenue and 70% of total revenue in fiscal 2020 came from the OAD and CVS therapeutic segments. The proportion has remained high over the years despite entry into new therapeutic areas such as central nervous system and gynaecology. Furthermore, the top 10 products account for half of the overall revenue with significant dependence on two main brands, Glycomet and Ecospirin. These factors expose the company to pricing pressure, threat of new advanced products at competitive prices, and the risk of pricing regulations. Share of the international segment has remained around 17%.

* Susceptibility to any adverse impact of regulatory changes and to intense competition
In the international market, the company has to comply with regulations and guidelines issued by various regulatory authorities. The company remains exposed to regulatory scrutiny and actions by various authorities. Additionally, pricing pressure persist in the regulated markets, which had led to a decline of over 20% in international revenue in fiscal 2018. In the domestic market, the company remains exposed to price revisions under the Drug Price Control Order, and to intense competition.
Liquidity Strong

Cash surplus (including marketable securities) was sizeable at around Rs 1,500 crore as on March 31, 2020, largely invested in debt mutual funds. The company has negligible debt and does not utilise its bank lines. Expected cash accrual of around Rs 500 crore per fiscal will be sufficient to meet capex and incremental working capital requirement. In fiscal 2020, the dividend outgo was over 60% of profit after tax; higher-than-expected outgo will remain a rating monitorable. Liquidity should remain robust over the medium term, supported by healthy cash generation, substantial cash and marketable securities, and no large capex plan.

Outlook: Stable

CRISIL believes USV will continue to benefit over the medium term from its healthy position in key high-growth therapeutic segments, and will maintain its strong financial risk profile supported by healthy cash accrual and liquidity.

Rating Sensitivity factors
Upward factors:
* Considerable ramp-up in operations with sustained revenue growth of over 15% per fiscal
* Significant diversification in revenue across geographies as well as therapeutic segments

Downward factors:
* Considerable decline in market position or in the operating profitability margin to below 25%
* Weakening of the capital structure and debt protection metrics due to substantial debt-funded capex or acquisitions, or considerable weakening of liquidity
About the Company

Incorporated in 1961, USV is a leading healthcare company with focus on branded generics. It also manufactures active pharmaceutical ingredients and biosimilars. Its manufacturing facilities are in Ratnagiri, Maharashtra; Daman; and Baddi, Himachal Pradesh. USV's stepdown subsidiary, US-based Indicus Pharma Llc, files for abbreviated new drug applications and supports marketing and distribution initiatives.

Key Financial Indicators
Particulars Unit 2020 2019
Operating income Rs crore 3218 3062
Profit after tax (PAT) Rs crore 820 788
PAT margin % 25.5 25.7
Adjusted debt/adjusted networth* Times 0 0
Interest coverage Times NA NA

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 crore)		 Complexity
level		 Rating assigned
With outlook
NA Short Term Bank Facility^ NA NA NA 50.0 NA CRISIL A1+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 64.0 NA CRISIL AA+/Stable
^Fully interchangeable with letter of credit and bank guarantee to the extent of Rs 10 crore
 
Annexure - List of entities consolidated
Company % of shareholding Rationale for consolidation
USV North America Inc 100.00% Subsidiary
USV UK Ltd 100.00% Subsidiary
Juta Pharma GmbH 100.00% Subsidiary
Key Pharma GmbH 100.00% Subsidiary
Indicus pharma LLC 100.00% Subsidiary
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
Fund-based Bank Facilities  LT/ST  114.00  CRISIL AA+/Stable/ CRISIL A1+      27-09-19  CRISIL AA+/Stable/ CRISIL A1+  29-06-18  CRISIL AA+/Stable/ CRISIL A1+  31-03-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA+/Stable/ 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
Proposed Long Term Bank Loan Facility 64 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 64 CRISIL AA+/Stable
Short Term Bank Facility^ 50 CRISIL A1+ Short Term Bank Facility^ 50 CRISIL A1+
Total 114 -- Total 114 --
^Fully interchangeable with letter of credit and bank guarantee to the extent of Rs 10 crore
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 Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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