January 04, 2017 Laborate Pharmaceuticals India Limited

Transcription

1 January 04, 2017 Laborate Pharmaceuticals India Limited Instrument* Rated Amount (In Crore) Long-term Fund Based 42.0 (enhanced from Rs. 32 crore) Short-term Fund Based 33.0 (enhanced from Rs. 28 crore) Short-term Non-Fund Based 5.0 (reduced from Rs. 15 crore) Total Rated Amount for 80.0 Bank Facilities (enhanced from Rs. 75 crore) *Instrument Details are provided in Annexure-1 Rating Action [ICRA]A- (stable) reaffirmed [ICRA]A2+ reaffirmed [ICRA]A2+ reaffirmed Rating Action ICRA reaffirms the long-term rating of [ICRA]A- (pronounced ICRA A minus) to the Rs Crore long-term bank facilities of Laborate Pharmaceuticals India Limited (Laborate). ICRA has also reaffirmed the short-term rating of [ICRA]A2+ (pronounced ICRA A two plus) to the Rs crore short-term fund and non-fund based bank facilities of Laborate. The outlook on the long-term rating is Stable. Rationale The reaffirmation of ratings takes into consideration stable financial performance of Laborate Pharmaceuticals in the recent period despite challenges in both the domestic and international markets. During FY 2016, Laborate continued to report stable financial performance as reflected by stable profitability as well as credit metrics. The ratings continue to factor in company s growing scale of operations in the branded generics segment in India aided by new product introductions as well as expanding market reach. Despite modest scale of operations, the company s business profile is characterized by well diversified product as well as therapeutic portfolio with top-3 products and therapies contributing ~15% and ~40-45%, respectively. Despite challenges in the domestic pharmaceutical market on account of ban on certain fixed dosage combination drugs, Laborate was able to expand its domestic business by 14% during FY 2016 by virtue of its swift modification in formulation of affected drugs. However, in contrast to its domestic business, exports declined by 28% on account of decline in exports to key markets viz. Nigeria (owing to challenging economic crisis and its impact of availability of US dollars) and Iraq (the ongoing political unrest). With regards, operating profitability, the company recorded a marginal improvement during the year (even as exports declined substantially) on the back of a stable domestic business and benefits of lower raw material cost and reduction in power costs. With lower than expected capital expenditure and reliance of external borrowings, company s interest cost also reduced during the year, resulting in stable debt metrics. The ratings also take into account the comfortable coverage indicators coupled with negligible long-term debt repayments in the near term and modest capital expenditure requirements. With presence in the branded generics segment, Laborate Pharma generates 75% (in FY2016) of its business from the domestic formulations markets with a portfolio focused on Antibiotics, Otolaryngology (E.N.T.), NSAIDs1 and Anti-diarrheals therapeutic segments. In some of the product categories, Laborate s key brands are positioned among the Top-5 products in their respective segments. With the objective to leverage on its well established distribution network, the company had ventured into the personal care product segment from FY2015 with focus on segments like Cosmetic and Ayurveda based face wash, shampoos, creams etc. Although the scale up of this division has been moderate, with 13.0% growth in FY2016 (from Rs crore in FY2015 to Rs crore in FY2016), ICRA expects the division to strongly ramp up in the medium to long term For complete rating scale and definitions, please refer to ICRA's Website or other ICRA Rating Publications 1 Non Steroidal Anti-inflammatory Drugs

2 on the back of the company s commitment to increase supply chain incentives and advertising campaigns for the same. The ratings also positively factor in the support to profitability by excise duty and income-tax exemptions that the company derives from operating in specific industrial zones like Paonta Sahib, Himachal Pradesh. However, this underlying support is only sustainable till FY2020, post which the company shall have to invest in manufacturing units at new duty free zones. Although Laborate has been able to steadily scale up its business over the past five years, the branded generics business remains highly competitive, being catered by a fragmented set of competitors. Unlike prescription-driven branded business, the scale-up in branded generics business is achieved by offering competitive pricing to distributors and retailers, resulting in relatively low entry barriers and subsequently lower operating margins. Laborate s prospects are dependent on the efficiency of its supply chain network and ability of marketing agents to garner sales. Thus it has to regularly invest in incentives for generic products and advertising for personal care products, due to limited brand recognition that can thereby impact profitability. The ratings are further constrained by the company s limited presence in metropolitan and Tier 1 cities in the domestic market and exposure to currency fluctuation risk (to the extent not hedged) through its exports to politically unstable countries in the international business vertical. Key rating drivers Credit Strengths Balanced geographical mix with 25% revenues generated from exports; well diversified domestic basket with no one region dominating sales Launching of the personal care division supports product diversification and boost both sales and margins Two Manufacturing facilities are located in Himachal Pradesh, one of which enjoys excise duty exemption and 30% income tax exemption till FY20 Negligible term loan repayments in the medium term Promoters and key personnel have significant experience in the pharmaceutical industry Credit Weakness Limited brand presence in Metros and Tier 1 cities; exposed to high competition in the fragmented branded generic industry Relatively weak margins as pricing is dependent on, competition and expenses to maintain a strong supply chain and regulatory restrictions; ability to steadily launch new products remains important in maintaining profitability indicators Products based on old molecules and 50% revenue generating products are under price control coverage; price cuts can impact revenue growth and margins to an extent Geographical exposure to politically unstable countries; high concentration of sales (~70% of exports) in Iraq and Nigeria Strong competition in the industry expected to keep the company s RoCE under pressure The company has limited hedging mechanism to manage the exchange rate fluctuation risk, generated from exports and borrowings; risk partially mitigated by natural hedge and absence of foreign loans

3 Description of key rating drivers highlighted above: The operating income of the company stood at Rs crore in FY2016 as against Rs crore in FY2015. The flat growth is attributed to the significant decline of 28% in exports in FY2016, which was made up by the company s strong presence in the domestic market (that reported 21% growth in FY2016) that helped sustain revenues. Going forward the company shall remain exposed to intense competition and adverse regulations in the domestic pharmaceutical segment and to country risk in the international space. Laborate s venture into the personal care segment, has provided diversification to its product portfolio. Although currently the division is contributing only 4% to revenues (in FY2016), the company expects its aggressive marketing and pricing strategies to support revenue growth in the medium term. With competition from established brands, Laborate is expected to take the medium to long term to gain brand recognition. Laborate generates around 25-30% of its revenues through export sales and purchases are mainly domestic exposing it to foreign exchange fluctuations risk. Links to applicable Criteria Corporate Credit Rating A Note on Methodology Pharmaceuticals, Rating Methodology About the Company: Established in 1985, Laborate, is engaged in the manufacturing and marketing of pharmaceutical formulation, both in the domestic and exports markets. It was founded by the Panipat-based Bhatia family, who head the specific functions of the operations as on date. The company manufactures pharmaceuticals and cosmetics from its Panipat and Paonta Sahib, Himachal Pradesh plants. After exporting its products for a decade, Laborate commenced selling its products in the domestic market under its own brand name. Laborate has a healthy mix of both domestic and international branded generic sales. Apart from using its own established marketing network to sell its products, the company also participates in tenders floated by various government bodies from time to time. The company s branded generics business can be divided into three verticals, the Elite division, GPP division and Personal Care division. While the Elite division has 350 active products, the Personal Care division has 80 cosmetic & ayurvedic preparations and the GPP division has 230 products. Status of non-cooperation with previous CRA: Suspended by CRISIL in July 2016 Any other information: Not Applicable

4 Rating History for last three years: Table: Rating History S.No Name of Instrument Type 1 Cash Credit Long Term 2 Packing Credit Short Term 3 LC/BG Short Term Current Rating Rated amount (Rs. Crores) Month-year & Rating December [ICRA]A- (Stable) Chronology of Rating History for the past 3 years Monthyear & Rating in FY2016 September 2015 [ICRA]A- (Stable) [ICRA]A2+ [ICRA]A [ICRA]A2+ [ICRA]A2+ Monthyear & Rating in FY2015 Not rated by ICRA Month- year & Rating in FY2014 Not rated by ICRA Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website

5 Annexure-1 Details of Instrument Name of the instrument Cash Credit Packing Credit LC/BG Date of issuance Source: Laborate Pharmaceuticals India Limited Coupon rate Maturity Date Size of the issue (Rs. Cr) Current Rating and Outlook [ICRA]A-(Stable) [ICRA]A [ICRA]A2+

6 Name and Contact Details of the Rating Analyst(s): Analyst Contacts Mr. Subrata Ray Mr. Shamsher Dewan Ms. Natasha Sonawane Name and Contact Details of Relationship Contacts: About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody s Investors Service is ICRA s largest shareholder. For more information, visit Copyright, 2017, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable, including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided as is without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

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