By Ankit Bhembre

India Ratings and Research (Ind-Ra) has rated Torrent Pharmaceuticals Limited’s (Torrent) short-term debt programme as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Commercial paper/short term non-convertible debentures

-

-

-

INR5,000

IND A1+

Assigned

The total amount of the debt programme will not exceed INR5,000 million. The commercial paper will not be carved out of fund based working capital facilities. 

The agency has taken a consolidated view of Torrent and its subsidiaries while arriving at the rating. Torrent has one subsidiary in India and 16 subsidiaries overseas, all of which are engaged in the manufacturing and selling of pharmaceutical formulations.

KEY RATING DRIVERS

Established Domestic Market Position: According to IMS MAT September 2017, Torrent ranks 15th in the Indian pharmaceutical market with a market share of 2.34%. It ranks third in cardiology, fourth in neurology, fifth in multivitamins and minerals and 10th in gastrointestinal therapies domestically. Torrent’s revenue for the domestic formulations business grew at a CAGR 19.4% over FY14-FY17 to INR19.7 billion and contributed 33.7% to the overall gross revenues of INR58.6 billion at FYE17. The strong growth was driven by its superior execution capabilities demonstrated by the successful integration of Elder Pharmaceuticals Limited’s portfolio (acquired in FY14), launching brand extensions under large established brands, rationalising sales force to ensure sustained relationships with physicians and improving sales force productivity. Torrent’s sales force productivity stands at INR7.1 million/person/year. Around 78% of Torrent’s domestic revenue is contributed by chronic and sub-chronic therapies. 

Strong R&D Capabilities:
Torrent has developed and successfully launched large limited competition drug formulations in the US markets. In 1HFY18, Torrent had 30 abbreviated new drug applications (ANDAs) awaiting approvals. Torrent filed 16 ANDAs in FY17 and expects to continue filing 15-20 ANDAs every year. It has an ongoing developmental pipeline of over 100 products covering dermatology, speciality oncology orals and injectables and a new chemical entity programme with three candidates in initial phases of clinical trials. Torrent’s R&D expenses increased at a CAGR of 46.9% to INR4.3 billion over FY14-FY17 and contributed 7.4% to gross revenue in FY17. Increasing R&D spends are likely to limit any significant improvement in operating profitability for the medium term. Torrent reported EBITDA margins of 23.7% at FYE17 (FYE16: 40.9%). 

Adequate Liquidity:
Torrent’s liquidity for FY18-FY19 is supported by high unencumbered cash and liquid investments of INR19.5 billion in 1HFY18 (FY17: INR16.9 billion). Torrent reported positive cash flow from operations (FY17: INR8.6 billion; FY16: INR24.9 billion) at FYE17. Ind-Ra expects working capital requirements to be stable and cash flow from operations to remain positive and healthy in FY18. Torrent has unutilised working capital line of INR10.5 billion at 1HFY18 which cushions liquidity. The ongoing capex of INR6.0 billion in 2HFY18-FY19 for capacity expansion at the formulation facility in Sikkim and setting up of a high potency oncology facility in Bileshwarpura will be funded through a mix of internal accruals and debt. Torrent also has repayments of INR2.6 billion in FY18 and INR8.9 billion in FY19. 

Subdued Credit Metrics till FY20:
The company has announced the acquisition of Unichem Laboratories Limited’s domestic formulation business (Unichem) in November 2017 for INR36 billion. The agency expects the ongoing acquisition to improve Torrent’s chronic speciality focus by filing gaps in anti-hypertensives, digestives and anti-depressants while improving market share in these therapies and enhancing sales force strength and distribution reach. However, Torrent’s total debt is expected to increase as the entire acquisition will be debt funded which will lead to elevated net debt/operating EBITDA (FY17: 0.6x; FY16: 0.4x) for FY18 and FY19. Furthermore, while the acquired business is EBITDA accretive, Torrent’s ability to improve the profitability of Unichem’s portfolio would be the key monitorable for margin accretion and improvement in net debt/operating EBITDA to below 2.5x beyond FY19. 

Concentration and Regulatory Risk:
The top 10 brand groups for Torrent and Unichem contributed 58.6% and 59.6% to the domestic revenue respectively, at FYE17. Also, around 12% of Torrent’s and Unichem’s combined domestic portfolio is under price control. The addition of medicines/formulations to the affordable drug list under National List of Essential Medicines is likely to subject medications to price ceiling issued under Drug Pricing Control Order which may inhibit the company’s growth in the domestic market. 

Torrent’s top 10 products contributed 69.7% to revenue from US markets in FY17. Its Indrad plant contributes nearly 75% to the revenue and accounts for 75% of the ANDAs pending for approvals. This increases the risk to US sales in the event of an adverse regulatory action.
A form 483 with five process-related observations was issued by the United States Food and Drug Administration in June 2017 related to the manufacture of two products at the formulation facility at Dahej. The same is being resolved by the company.


RATING SENSITIVITIES

Negative: Free cash flow turning negative or a decline in the operating profitability and credit metrics with net debt/EBITDA staying above 2.5x beyond FY19 will lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1959, Torrent manufactures branded and generic formulations. Dosage forms include tablets, capsule and extended release formulations. Its major markets include India, the US, Germany and Brazil.

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Net revenue (INR million)

58,212

66,764

EBITDA (INR million)

13,773

27,330

EBITDA margin (%)

23.7

40.9

Total debt (INR million)

25,886

24,163

Cash and cash equivalents (INR million)

16,972

14,266

Source: Torrent, Ind-Ra



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankit Bhembre

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356197

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121