EMCURE PHARMACEUTICALS LTD.
Long-term Bank Facilities Short-term Bank Facilities CARE A+ PR2+
Rating CARE has assigned CARE A+ (Single A Plus) rating to the Long-term Bank Facilities of Emcure Pharmaceuticals Ltd. (EPL). This rating is applicable for facilities having tenure of over one year. Facilities with this rating are considered to offer adequate safety for timely servicing of debt obligations. Such facilities carry low credit risk. Also, CARE assigned PR2+ (PR Two Plus) rating to the Short-term Bank Facilities of EPL. This rating is applicable for facilities having tenure up to one year. Facilities with this rating would have adequate capacity for timely payment of short-term debt obligations and carry higher credit risk as compared to facilities rated higher. CARE assigns + or - signs to be shown after the assigned rating (wherever necessary) to indicate the relative position within the band covered by the rating symbol. These ratings are assigned to the long-term and short-term bank facilities aggregating Rs.512.97 crore (including outstanding term loan of Rs.257.97 crore). Further, CARE has assigned CARE A+ (Single A Plus) rating to the proposed Long-term Non-Convertible Debenture (NCD) issue aggregating Rs.60 crore. The proposed NCDs would have tenure of five years with equal repayment in the third, fourth and fifth year from the date of its allotment.
Company Background EPL was incorporated on April 16, 1981 as a private limited company and was engaged in manufacturing of pharmaceutical products (mainly formulations) either on Loan License (LL) or Principal to Principal (P2P) basis, exclusively for various players, through its multiple manufacturing facilities built during the period 1981 to 1995. In 1995, the company set up its own manufacturing plant for formulations at Bhosari, Pune. With focus on sales of its own brand, the company increased its marketing and distribution network, gradually expanded its manufacturing facilities and acquired pan-India presence. Subsequently, in August 2001, the company was converted to a public limited company. The company however, sold many of its loan license facilities and continued its thrust on P2P-basis manufacturing till FY08. In August 2006, Blackstone Group a private equity fund, invested US$ 50 million in EPL in order to boost its expansion and acquisition activities. As on March 31, 2008, the company is managed by a ten-member Board of Directors with Mr. Humayun Dhanrajgir, being the Independent Chairman and Mr. Satish Mehta, promoter, being the Managing Director. The Board members are professionals with vast experience in their respective fields. The Board is assisted by a well-experienced key management team which has vast experience and has been with the company for a long time. As on March 31, 2008, the company had six subsidiaries out of which four were in India and two outside India (in USA and Nigeria). Out of the above, EPL has given corporate guarantee to the tune of Rs.18 crore, Rs.12.27 crore and Rs.57.25 crore, respectively, to its subsidiaries viz. Zuventus Healthcare Ltd (ZHL), Emcure Pharmaceutical USA, Inc. (EPL-USA) and Gennova Biopharmaceuticals Ltd (GBL),. Of the three subsidiaries, ZHL is a profit making company with a turnover of Rs.144.90 crore, PBILDT of Rs.11.84 crore and PBT of Rs.7.40 crore for the nine months ended December 31 2008. EPL has now availed
The ratings factor in EPLs long track record, experienced management, presence in diversified segments, focus on chronic segments, the United States Food and Drug Administration (USFDA) approved manufacturing facilities, fiscal benefits associated with the proposed manufacturing facility, strong marketing network and long-term contracts with global pharmaceutical companies. The ratings are, however, constrained by moderate profitability margins, pending product registrations for expected product pipelines, project implementation risk, debt-funded capex and intense competition in semi and unregulated markets. The ability of the company to successfully implement its oncology project is the key rating sensitivity.
CREDIT ANALYSIS & RESEARCH LIMITED
term loan to the tune of Rs.32.70 crore from Bank of Maharashtra which would be utilised to repay the bridge loan availed by EPL-USA thereby vacating the corporate guarantee given. The corporate guarantee to GBL also stands reduced to Rs.32.25 crore on account of repayment of the corresponding term loan. Operations of the Company EPL is a vertically integrated company with a major thrust in areas of manufacturing and marketing of formulations (own brands), Active Pharmaceutical Ingredients (APIs), Contract Research and Manufacturing Services (CRAMS), Research & Development (R & D) and Biotechnology. As on March 31, 2008, the company has five operational manufacturing facilities at Pune of which three were USFDAapproved. EPL undertakes research, manufacturing and marketing of its formulations under its own brands in the domestic market as well as exports to over 60 countries, mainly to semi-regulated and unregulated markets. Over a period of time, the company has developed more than 300 own brands in diversified segments viz. Pain Management, Anemia Management, Gynecology, Anti Retrovirals, Anti HIV, Pediatrics etc. EPLs main focus is on the chronic segments viz. Cardiology, Nephrology and Oncology. As on March 31, 2008, EPL had pan-India presence with 1,500 medical representatives undertaking sales promotion activities, 27 distribution hubs, 2,500 wholesalers and coverage of 300,000 doctors. For exports, EPL markets its products through local country managers and distributors appointed in that respective country. The company enters into long-term contracts (usually for five years) with the global pharmaceutical players like Teva, Pfizer, LPC, Actavis etc for supply of tablets & capsules. EPL has also entered into long-term contract with Sandoz, Navinta and Pfizer for supply of injectibles. In addition, the company has strategic alliances with global giant, Bristol-Myers Squibb (BMS), who has given royalty fee license to the company for manufacturing and marketing of anti-HIV drug viz Atazanavir. This product will be available in 60 sub-Saharan, African countries and in India. The product registration is a time consuming activity; thus, any delay would impact the topline of the company. Ongoing / Expansion Plans
manufacturing facility at Jammu & Kashmir which is expected to commence operations from April 1, 2009. The total cost of the project was Rs.25.68 crore, which was funded through term loan of Rs.16 crore from ABN Amro Bank and balance of Rs.9.68 crore through internal accruals.
Oncology Injectible manufacturing facility at Hinjewadi, Pune:
With a view to cater to the chronic segment viz. oncology, EPL plans to set up a manufacturing facility at Hinjewadi, Pune. The facility is proposed to be USFDA-compliant so as to cater to the regulated markets viz. USA and Europe. The total cost of the project is estimated at Rs.51.09 crore. The above project cost is to be funded by a mix of both debt of Rs.24 crore and internal accruals of Rs.27.09 crore, with debt to equity ratio of 0.89:1. The commercial production is expected to commence from FY10-11. The entire debt is tied up with Standard Chartered Bank comprising Rupee Term Loan of Rs.12.00 crore and Foreign Currency loan of US$3.00 mn, equivalent to Rs.12.00 crore. As on date, the company has incurred expenditure of Rs.47.00 crore on the project.
Other Capex programmes
In addition to the above, the company has other capex programmes on intangibles viz. product development, API capex, R & D etc., wherein the expenses are to be capitalised during FY09. In the same year, the company proposes to capitalise approximately Rs.120.24 crore. The same is expected to be funded through a debt of Rs.75 crore and balance of Rs.45 crore through internal accruals, with a project gearing of 1.66x. Financial Performance Turnover of EPL increased at a Compounded Annual Growth Rate (CAGR) of 20.69% over the past four years on account of favourable demand scenario, various capex activities undertaken by the company with capacity additions by establishment of new manufacturing facilities, development of new products, receiving USFDA approvals, thereby opening up export in regulated markets and tapping new markets and clients, both in the field of contract manufacturing and API/formulations. However, domestic sales in FY08 dipped over FY07 due to change in the regulatory framework wherein the Uttar Pradesh (UP) State
Manufacturing facility at Jammu & Kashmir:
In order to meet the increase in demand, enhance its competitiveness and to avail fiscal benefits like ten-year tax break, excise exemption etc., EPL has set up its
CAREVIEW
suspended licences of some of its fixed-dose combinations with requirement of its renewal, reduction in sales in UP on account of Value Added Tax (VAT) issues and further reduction in Maximum Retail Price (MRP) on various medicines consequent to a reduction in excise duty. The exports in FY08 increased to Rs.99.33 crore from Rs.70.54 crore in FY07 backed by multiple contracts with top pharma majors in the year. Also, during the year FY08, two of its facilities received USFDA approval. The PBILDT of the company declined by around 48% on account of reduced domestic sales and increase in costs related to employee, factory expenses and expenses related to sales and promotion. The expenses related to employees and other costs added to the overall expenses and resulted in reduced margins for FY08. The depreciation charge increased from Rs.13.25 crore in FY07 to Rs.16.85 crore in FY08 on account of part-capitalisation of facilities at Hinjewadi, Pune. The interest cost includes interest on debts and exchange gain/(loss) on account of hedging of principal and interest. Thus, the interest cost in FY08 marginally decreased to Rs.14.83 crore from Rs.15.07 crore in FY07, on account of gain on hedging and repayment of External Commercial Borrowing (ECB). The interest cost excluding the hedging gain has increased during the period. This led to a drastic reduction in the interest coverage ratio to 1.76x in FY08 as compared to 4.63x in FY07, mainly on account of drastic reduction in PBILT (by 62%) in FY08 and marginal decrease in the interest expenses. The PAT for FY08 has shown a decline as compared to that in FY07, in line with a decline in PBILDT levels. As on March 31, 2007, the equity share capital has shown an increase on account of issue of bonus shares by way of capitalisation of reserves. Further, in FY07, Blackstone had invested US$ 50 mn in EPL by means of Optionally Convertible Redeemable Preference Shares (OCRPS) and equity. The funds invested by Blackstone were for setting up of new facilities and R&D investment. EPL increased its stake in Gennova Bio Pharmaceuticals Ltd. to the tune of Rs.15.00 crore as by way of preference shares. Apart from the foregoing, the company parked Rs.60.00 crore in various mutual fund schemes. The debt to equity ratio was fairly comfortable for the period under review. The debt equity ratio increased to 1.25x as on March 31, 2006 from 0.72x as on March 31, 2005 on account of increase in term loan to fund the capex. On a conservative basis, on deducting the investment in subsidiaries from the networth of the company, the
Financial Results (Rs. crore) For the year / As on March 31 Working Results Net Sales Total income PBILDT PAT (after deferred tax) Net cash accruals Financial Position Equity share capital Net worth Total capital employed Net fixed assets Net working capital Investments 12 78 174 91 76 5 12 101 276 158 88 9 31 341 582 225 244 88 31 356 658 266 226 63 249 256 37 19 24 339 344 54 28 34 426 447 83 46 59 437 453 43 25 39 2005 2006 2007 2008
Ratios Profitability (%) PBILDT/Total income PAT/Total income ROCE (Total) Solvency (times) Long-term debt equity ratio Long-term debt equity ratio* Overall gearing ratio Overall gearing ratio* Interest coverage Liquidity(times) Current ratio Quick ratio Turnover (days) Average collection period Average creditors Average inventory
14.46 7.43 -
15.70 8.01 22.65
18.56 10.01 19.85
9.49 5.30 8.05
0.72 1.18 1.25 2.04 4.92
1.25 2.04 1.58 2.83 4.47
0.49 0.64 0.63 0.92 4.63
0.63 0.95 0.85 1.31 1.76
1.24 0.87
1.33 0.94
1.97 1.56
1.46 1.01
48 58 61
58 57 66
77 63 89
* excluding investments in subsidiaries
gearing ratios were reworked and the overall gearing stood at 1.31x as on March 31, 2008. The debt to equity and overall gearing ratios as on March 31, 2008 on treating corporate guarantee of Rs.32.25 crore as debt stood at 0.79x and 1.03x, respectively. The company has a comfortable current ratio with inventories and receivables forming around 31% and 30%, respectively, of the total current assets.
CREDIT ANALYSIS & RESEARCH LIMITED
The company posted a turnover of Rs.285 crore and PBT of Rs.15 crore during the half-year ended September 2008 with PBILDT and PBT margin at 15.18% and 5.26%, respectively. Derivatives exposure The company has entered into option derivative contracts for hedging the export receivables. As on March 31, 2008, EPL had incurred a Mark To Market (MTM) loss of Rs.12.97 crore in respect of those option contracts. Of these, it has expensed loss of Rs.11.20 crore in H1 FY09. The company has entered fresh option derivatives positions to hedge its export receivables and as on December 03, 2008, the company incurred a MTM notional loss of Rs.254.00 crore on the derivatives. However, the companys export receivables during the past nine months ended December 2008 have been sufficient to meet the monthly commitments towards the derivative contract. Industry Outlook Driven by the knowledge, skill, growing enterprise, low costs, improved quality and demand (domestic and international), the pharmaceuticals sector has witnessed a tremendous growth over the past few years. The industrys growth rate is likely to touch 19 per cent according to a projection released by the Confederation For Further details please contact at :
of Indian Industries (CII), on September 1, 2008. The incremental growth of 6.6 per cent will be bolstered by factors like a growing middle class (contributing 2 per cent of the incremental growth), pricing of the pharma products (1 per cent), untapped rural markets (2 per cent) and marketing efficiencies (1 per cent). According to a leading international agency, the Indian pharmaceutical industry is projected to grow to US$25 billion by 2010 whereas the domestic market is likely to more than triple to US$20 billion by 2015 from the current US$6 billion to become one of the leading pharmaceutical markets in the next decade. The country exported drugs worth US$7.2 billion in 2007-08 and the US and Europe were the biggest export destinations for Indian generic manufacturers, followed by emerging markets like Central and Eastern Europe, Latin America and Africa. However, despite the impressive growth of the sector and low costs, there are several concerns which need to be addressed like, issues pertaining to accessibility and affordability of medicines by the common man particularly the vast segment of poor population, instituting standards of quality, particularly for units not conforming to standards of regulated markets, strengthening the fragmented regulatory system, sustaining growth of generics the main forte of the Indian industry, meeting the challenge of product patent regime and so on. January 2009
CREDIT ANALYSIS & RESEARCH LIMITED 4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (E), Mumbai - 400 022. Tel.: (022) 6754 3456 Fax : (022) 6754 3457 E-mail : care@careratings.com
Disclaimer
CAREs 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.
CAREVIEW
