EMCURE PHARMACEUTICALS LIMITED

Transcription

1 EMCURE PHARMACEUTICALS LIMITED Ratings Facilities Amount (Rs. crore) Long-term Bank Facilities (reduced from ) Short-term Bank Facilities (reduced from 117) Long/Short-term Bank Facilities 313 (enhanced from 258) Total Facilities Ratings 1 CARE A+ [Single A Plus] CARE A1 [A One] CARE A+/CARE A1 [Single A Plus/A One] Remarks Rating Rationale The ratings assigned to the bank facilities of Emcure Pharmaceuticals Limited (EPL) continue to derive strength from the experience and long track record of the promoters and accredited manufacturing facilities, favorable financial risk profile marked by growth in the total operating income and comfortable capital structure. The ratings are further underpinned by the diversified product portfolio with new launches and long-term contracts with the pharmaceutical majors. The ratings are, however, constrained by EPL s increasing exposure towards subsidiaries and the intense competition in the generic formulations industry along with regulatory risk inherent to the pharmaceutical industry. The ratings further take note of the proposed debt funded capex towards setting up new Research & Development (R&D) facility in Gujarat. The ability of the company to further increase the scale of operations by expanding its footprint in new markets and therapeutic segment, improvement in the profitability margins and reduced exposure towards subsidiaries are the key rating sensitivities. Background EPL, incorporated on April 16, 1981, by Mr Satish Mehta, is engaged in the manufacturing of formulations and Active Pharma Ingredients (APIs). The company has five manufacturing facilities in Pune and one in Jammu. These facilities are accredited by regulatory authorities such as US Food and Drug Administration (USFDA), Therapeutic Goods Administration (TGA) - Australia, Canada Food & Drug Administration, etc, and are also compliant with the Current Good Manufacturing Practices (CGMP) norms of various regulated and semi-regulated markets. Furthermore, the company also has five dedicated R&D facilities for APIs and formulations. EPL is a vertically-integrated company with major thrust on manufacturing and marketing of formulations (own brands) as well as APIs, Contract Research and Manufacturing Services (CRAMS) and R&D. For its own formulation brands, the company caters to the semi and less-regulated markets. The company caters to most of the chronic therapeutic segments such as Cardiology, Nephrology, Anti-HIV, and Neurology and also has presence in acute segments such as Anti-infective, Pain Management, Dermatology, Gynecology and Pediatrics. On April 29, 2011, EPL acquired HPI (Heritage Pharmaceuticals Inc.) through its subsidiary Emcure Pharmaceuticals Holding, USA. The acquisition was through a reverse merger of Emcure Pharmaceuticals Holding USA and Heritage Pharma Holdings Inc (holding company of HPI). Also, during November 2012, EPL acquired worldwide rights of BICNU, a branded oncology product from Bristol Myers Squibb (BMS), a USA based company for around Rs.55 crore. As on March 31, 2013, EPL had 11 associate companies, of which two are yet to commence business. EPL has extended corporate guarantees amounting to Rs crore as on March 31, 2013 (Rs crore as on March 31, 2012) to its subsidiaries and group companies. Credit Risk Assessment Experienced management and long track record of the promoters The promoters have more than three decades of experience in the pharmaceutical industry. The company began as a contract manufacturer of formulations for Multinational companies for their domestic operations with clientele like GSK, Pfizer, P&G, 1 Complete definitions of the ratings assigned are available at and in other CARE publications 1

2 Novartis, etc. It diversified into manufacturing formulations under its own brands and has continuously launched new products as well as expanded its clientele. The company has manufacturing facilities across API, formulations and bio-technology. Diversified product portfolio with new launches EPL is a vertically-integrated company, which manufactures APIs and formulations, and is also involved in bio-technology. EPL has presence in the chronic therapy segments such as Cardiology, Nephrology, Anti-HIV and also has presence in acute segments such as Anti-infective, Pain Management, Anemia, Gynaecology, Anti Retrovirals, Pediatrics, etc. During 9MFY14 (refers to period from April 1 to December 31), EPL launched new products like Carmuta, Olmegard, Sevlamar, Sporotar, Stabose, Evelimus, Hepalo, etc. primarily under oncology, anti-infectants and cardiac therapeutic segments. Further during the same period, EPL has received 12 USFDA approvals (making a total to 24 USFDA approvals) for selling generic formulations in US markets including Zoledronic Acid and Cidofovir injections. The said products would be manufactured by EPL and marketed by US based subsidiary, HPI in US markets. Furthermore, the company has number of product launches in pipeline in the cardiac, anti-retroviral, hormones, anti-infectives, anti-diabetic therapeutic segments. Accredited manufacturing facilities EPL has seven manufacturing facilities, out of which, four are USFDA approved, one is UK Medicines & Healthcare Products Regulatory Agency (MHRA) approved, one approved by the Geneva WHO, one by the South African Medicine Control Council, (MCC). Furthermore, the company has two R&D centers, both of which are recognised by the Department of Scientific & Industrial Research (DSIR). The facility at Jammu manufactures products for the domestic markets. The facilities at Pune are also similarly accredited. Long-term contract with pharmaceutical majors EPL has a pan India presence through its strong distribution network. Furthermore, some of the leading customers of EPL in the international market include Teva, Pfizer, Sandoz, GSK and Chiral Biosciences. EPL does contract manufacturing for most of these foreign pharmaceutical MNCs. The company generally enters into long-term contracts averaging to around 4 to 5 years with these companies. However, the contracts do not have any clause pertaining to minimum quantity and prices. During FY13 (refers to the period April 01 to March 31), exports accounted for 51% of EPL s sale against 59% in FY12. Sales to US accounted for around 71% of the total exports sales during FY13. Increasing exposure towards subsidiaries EPL has extended financial support to its subsidiaries in the form of corporate guarantee towards bank facilities, and extension of loans and advances. The corporate guarantee extended by EPL to the subsidiaries and associates amount to Rs crore (44.35% of the EPL s net worth) as on March 31, 2013 vis-à-vis Rs crore (39.6% of the net worth) as on March 31, Furthermore, the company has provided financial assistance to them through providing long-term loans/advances amounting to Rs crore as on March 31, 2013 vis-à-vis Rs.3.09 crore as on March 31, While, the short term loans and advances reduced to Rs crore as on March 31, 2013, as compared with Rs crore as on March 31, Investments made towards subsidiaries increased by Rs crore to Rs crore as on March 31, Financial risk profile marked by healthy profitability and solvency ratios, albeit high contingent liabilities During FY13, the growth in total operating income (TOI) remained subdued at on account of low demand from some of the major customers. However, during 9MFY14, the TOI grew by 27% y-o-y backed by increased volume of sales in US markets on account of increased USFDA approvals received during the year. The PBILDT margin reduced marginally to 18.12% in FY13 against 19.43% in FY12 due to increase in employee costs and selling and distribution expenses. The PAT margin also moderated to 7.30% in FY13 against 9.60% in FY12 primarily due to loss on foreign exchange derivative contract amounting to Rs crore in FY13. During 9MFY14, EPL achieved a total income of Rs.1264 crore (against TOI of Rs.995 crore in 9MFY13) and a PBT of Rs.192 crore. Overall gearing deteriorated to 1.02x as on March 31, 2013 against 0.78x as on March 31, 2012 due to increase in term debt for capex and towards purchase of Bicnu brand for USD 10 mn (equivalent to Rs.55 crore), investment in Emcure Pharmaceuticals USA of USD 10 mn for the purchase of remaining 35% stake. Furthermore, the term loans also include liability towards repayment of derivative settlement with ICICI bank for Rs.55 crore. The remaining term loans were availed for meeting the capex requirements. The overall gearing (including corporate guarantees) increased to 1.47x as on March 31, 2013 against 1.18x as on March 31, During 9MFY14, EPL raised funds worth Rs.10 crore though issue of right shares to the existing shareholders. 2

3 Solvency ratios though deteriorated moderately for FY13, however, remained comfortable. Interest coverage was at 3.70x for FY13 against 3.88x for FY12. The total debt/gca levels deteriorated to 4.14x as at the end of FY13 against 2.42x at the end of FY12 due to lower GCA levels and an increase in interest costs on account of increase in debt. The current ratio continued to be under pressure due to retirement of term debt and stood at 1.02x as on March 31, 2013, against 0.96x on March 31, Settlement of derivative-based litigation In October 2007, the company had entered into seven option derivative contracts with banks for hedging its future export receivables. In September 2010, the company filed civil suits against the said banks challenging the validity of these derivative contracts. In turn, these banks had initiated various proceedings against the company. The pending derivative contracts based litigations with ICICI Bank has been settled in April The company subsequently reached settlements with all the banks. Furthermore, as on December 31, 2013, EPL does not have any outstanding derivative contracts with any bank or financial institution. Intense competition in the pharmaceutical industry The company faces intense competition in the domestic as well as semi and unregulated markets. Pricing pressure, increasing regulation, increased sensitivity towards product performance are the key issues in the pharmaceutical industry. Ongoing debt funded capex towards new R&D facility EPL is in the process of setting up new R&D facility in Gujarat for in-house development of new formulations and drugs. The facility is expected to cost around Rs.150 crore and is to be developed in two phases. Phase one includes expenses towards land and building and is expected to cost around Rs.35 crore in FY14 and phase two includes cost towards setting up plant and machineries and other operational costs with a total cost of Rs.115 crore. The facility is expected to become operational by Q1FY16. Prospect Keeping in mind EPL s commitments, it is imperative for it to achieve further growth in total income by venturing into newer markets and therapeutic segment, thereby, enhancing profitability levels and ensuring a comfortable quantum of cash generation for meeting its commitments towards debt repayment, capex and investment and further reduction in exposure towards the subsidiaries and timely raising of funds through Initial Public Offerings as envisaged remains critical for the prospects of the company going forward. EPL has filed a Draft Red Herring Prospectus (DRHP) in July 2013 to raise funds for meeting the capex requirements and providing and exit route to PE, Blackstone Partner s Mauritius. Financial Performance (Standalone) (Rs. Cr) For the year ended /As at March (12m, A.) Working Results Total Operating Income PBILDT Interest and Finance Charges Depreciation PAT (After Deferred Tax) Gross Cash Accruals Financial Position Equity Share Capital Tangible net worth Total Capital Employed Key Ratios Growth (%) Growth in total operating income Growth in PAT (19.82) Profitability (%) 3

4 For the year ended /As at March (12m, A.) PBILDT / Total Income PAT / Total Income ROCE Solvency (times) Long-term Debt Equity Ratio Overall Gearing Interest Coverage Term Debt / Gross Cash Accruals Total Debt / Gross Cash Accruals Liquidity Current Ratio (times) Quick Ratio (times) Turnover Average Collection Period (Days) Average Inventory Period (Days) Average Creditors Period (Days) Operating cycle (Days) A: Audited Analyst Contact Name: Leena Marne Tel: Mobile: leena.marne@careratings.com (This follows our brief rationale for entity published on 03 April, 2014) DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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