Credit Analysis & Research Limited. Complete definitions of the ratings assigned are available at and other CARE publications

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1 Neuland Laboratories Limited Ratings Facilities Amount (Rs. crore) Ratings 1 Remarks Long-term Bank Facilities (enhanced from Rs crore ) CARE BBB- (Triple B Minus) Reaffirmed Short-term Bank Facilities (enhanced from Rs crore ) CARE A3 (A Three) Reaffirmed Total (Rupees Two Hundred Ninety Nine crore and Ninety One lakh only) Rating Rationale The ratings of Neuland Laboratories Limited (NLL) continue to derive strengths from experienced promoters having long-term presence in the industry, diversified revenue and customer profile, moderate financial performance with consistent operating revenue in FY15 (refers to the period April 1 to March 31), improved capital structure backed by equity infusion, moderate operating cycle, moderate product mix, strategic corporate reorganization to focus on its core business of manufacturing active pharmaceutical ingredients (API) and approved manufacturing facilities. The ratings are, however, constrained by drop in profitability margins in FY15, absence of significant long term contracts with customers, highly competitive nature of bulk industry and exposure to foreign exchange fluctuation risk. The ability of the company to grow its revenue base, improve profitability margins and manage working capital requirement efficiently and maintain healthy liquidity position are the key rating sensitivities. Background Incorporated in January 1984, NLL was set up as a private limited company by Dr D R Rao and Mr G V K Rama Rao and was reconstituted as a public limited company, with the current nomenclature, in NLL manufactures active pharmaceutical ingredients for global pharmaceutical companies and provides end-to-end solutions for the pharmaceutical industry for chemistry-related services. It supplies to pharmaceutical companies across India, Europe and North America amongst others with a presence in over 85 countries. NLL has two manufacturing facilities in Hyderabad, Telangana. The manufacturing facilities compliant with health and regulatory agencies cgmp certifications, namely, USFDA (USA), Canada (HC), PMDA (Japan), KFDA (Korea), EU (EMA), EDQM (COS) and others (ROW). The company has portfolio of around 75 Products with presence in 10 therapeutic segments including anti-asthmatic, anti-infective, anti-ulcerants, anti-fungals, cardiovascular, flouroquinolones, central nervous system (CNS) and anti diabetic. NLL is listed on BSE Limited and National Stock Exchange (NSE). Credit Risk Assessment Experienced promoters NLL is led by Dr Davuluri Rama Mohan Rao, the Chairman & Managing Director of the company, who has over 40 years of experience in the pharmaceutical industry. Before promoting Neuland in 1984, Dr D R. Rao has held senior positions in research and development, production and quality assurance at Glaxo India for nearly 10 years. He is a member of Royal Society of Chemistry. NLL s manufacturing facilities are compliant with cgmp certification standards. The sites have been audited and certified by the regulatory authorities from USFDA (USA), Canada (HC), PMDA (Japan), KFDA (Korea), EU (EMA), EDQM (COS) and others (ROW). Diversified revenue and customer profile NLL has portfolio of 75 products (largely APIs). Ciprofloxacin, the flagship product of NLL has remained largest revenue contributor with 20.66% in FY15 as against 24% in FY14. Decline in the contribution of Ciprofloxacin (Antibacterial therapeutic segment) is primarily to reduce risk of revenue stream from single product. Followed by Levetiracetam (Anticonvulsant therapeutic segment) contributed 11.22% in total operating revenue in FY15. The top 5 products contributed about 49.16% in FY15 over 46.91% in FY14. Furthermore, NLL has presence across 10 therapeutic segments. During FY15, anti-bacterial therapeutic segment has contributed major revenue followed by anticonvulsant therapeutic segment, together accounting for 39% of net sales. The company has been generating revenue from customers with long standing relation with an average of 15 years of association. The company enjoys dependable relationships with major global and Indian pharma majors. Top five clients of the company accounted for 34% of the net sales in FY15 against 43% in FY14. 1 Complete definitions of the ratings assigned are available at and other CARE publications 1

2 Moderate operating revenue albeit decline in profitability margins in FY15 Operating revenue remained consistent (almost same as FY14) during FY15 to Rs crore. Primarily, reason for muted growth in revenue was that during the year NLL had undergone four regulatory audits by various health agencies and the company had also undertaken plant maintenance and up gradation in Unit II resulting into lower sales volumes. While, the PBILDT margin has declined to 14.36% in FY15 owing of increased fixed overheads on account of slowdown in operational activities during the year; the PAT margin has also dropped to 3.36% in FY15 with increase in interest obligation owing to high utilization of bank borrowing during FY15. Equity infusion resulting in consistent improvement in capital structure While debt to equity has remained below unity at 0.27x as on March 31, 2015, improved from 0.41x as on March 31, 2014; overall gearing has also strengthened to 1.19x as on March 31, 2015, against 1.56x as on March 31, Improved capital structure was owing to repayment of inter corporate debt and increase in net worth with accretion of profits to reserve and equity raised by way of rights issue to the tune of Rs crore (equity of Rs.1.23 crore and share premium of Rs crore). However, term debt/gca and Total debt/gca has weakened to 1.27x and 5.68x in FY15 with increase in term loans and bank borrowings coupled with lower cash accruals. Moderate operating cycle Working capital cycle has remained almost in line with FY14. Collection period and inventory holding period of the company has increased to 95 days and 98 days in FY15 against 82 days and 93 days respectively. Increase in collection period and inventory holding period was buffered by increase in creditors period from 72 days in FY14 to 87 days in FY15. In addition, there was also increase in working capital utilization level from Rs crore in FY14 to Rs crore in FY15. The average working capital utilization in last 12 months ending June 2015 has remained 92.33%. Highly fragmented industry The Indian pharmaceuticals market is third largest in terms of volume and 13 largest in terms of value. The market is dominated majorly by branded generics which constitute nearly 70-80% of the market. Considered to be a highly fragmented industry, consolidation has increasingly become an important feature of the Indian pharmaceutical market. The industry is estimated to grow at 20% compound annual growth rate (CAGR) over the next 5 years. Indian pharmaceutical manufacturing facilities registered with US Food and Drug Administration (FDA) as on March 2014 was the highest at 523 for any country outside the US. The growth in Indian domestic market will be on back of increasing consumer spending, rapid urbanization, raising healthcare insurance and so on. Prospects Going forward, better growth in domestic sales will depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers are on the rise. NLL derives around 10.52% of its net sales together from anti-depressant and anti-diabetic therapeutic segments. The ability of the NLL to further enhance the scale of operation with the increased presence in segments like anti-cancers, cardiovascular, anti-diabetes and anti-depressants while improving the profitability margins would be key growth drivers. Financial Performance (Rs. Cr) For the period ended / as at March 31, (12m, A) (12m, A) (12m, A) Working Results Net Sales Total Operating income PBILDT Interest Depreciation PBT PAT (after deferred tax)

3 Gross Cash Accruals Financial Position Equity Share Capital Tangible Net worth Total capital employed Key Ratios Growth Growth in Total income (%) Growth in PAT (after D. Tax) (%) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Average cost of borrowing (%) Solvency Long-term Debt Equity ratio (times) Overall Gearing PBILDT Interest coverage (times) Term debt/gross cash accruals (years) Total debt/gross cash accruals (years) Liquidity Current ratio (times) Quick ratio (times) Turnover Average collection period (days) Average creditors (days) Average inventory (days) Operating cycle (days) Details of Rated Facilities 1.Long-term facilities 1.A. Secured rupee term loans Sr. No. Lender Rated Amount Remarks 1. State Bank of India 1.01 Outstanding as on June 30, Export-Import Bank of India 4.50 Outstanding as on June 30, Bank Of India Outstanding as on June 30, Proposed Total Facility (Rs. crore) 1.B. Fund-based limits (Rs. crore) Sr. No. Name of Bank Fund-based limits CC* FBD/FBP** EPC/PCFC# Total fund-based limits 1 State Bank of India Bank of India Indian Overseas Bank Kotak Mahindra Bank Ltd Ratnakar Bank Ltd TOTAL

4 *CC=Cash credit; **Foreign Bill Discounting/ Foreign Bill Purchase; #Export Packing Credit/Pre-Shipment Credit in Foreign Currency. Total Long-term facilities (1.A.+1.B): Rs crore 2. Short-term facilities 2.A. Non-fund-based limits Sr. No. Name of Bank Non-fund-based limits LCs/ BGs* Forward Contract Limit Total non-fund-based 1 State Bank of India Bank of India Indian Overseas Bank Proposed TOTAL *LC=Letter of credit; BG=Bank guarantee Total Short-term facilities (2.A.): Rs crore Total Bank Facilities (1+2): Rs Analyst Contact Name: Mr. Vidhyasagar L Tel: vidhya.sagar@careratings.com (This follows our brief rational for entity published on 16 September, 2015) 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. In case of partnership/proprietary concerns, the rating assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 4

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