By Ankit Bhembre

India Ratings and Research (Ind-Ra) has affirmed Torrent Pharmaceuticals Limited’s (Torrent) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loan

-

 

-

March 2021 - December 2025

INR23.5

IND AA/Stable

Affirmed

Non-convertible debentures (NCDs)

INE685A07082

13 December 2017

7.98*

12 December 2025

INR10.0

IND AA/Stable

Affirmed

NCDs#

-

-

-

-

INR3.0

IND AA/Stable

Assigned

*initial interest rate, thereafter on every reset date 182 days T-bill rate + 1.72% p.a.

#yet to be issued

Analytical Approach: Ind-Ra continues to take a consolidated view of Torrent and its subsidiaries while arriving at the ratings, on account of similar line of business. Torrent has one partnership firm in India and 17 subsidiaries (including step-down subsidiaries) overseas.

KEY RATING DRIVERS

Deleveraging on Track: The affirmation reflects improvement in Torrent’s consolidated net leverage (net debt/operating EBITDA) in FY19-1QFY20 in line with the agency’s expectations to 2.5x (FY18: 3.2x). This was driven by a 47% yoy increase in operating EBITDA to INR19.83 billion in FY19 and a reduction in consolidated debt to INR61.33 billion (FY18: INR65.61 billion). The consolidated operating EBITDA margins also improved to 25.8% in FY19 (FY18: 22.5%), led by the benefits of acquisition in the domestic markets and recovery in the US markets. At 1QFYE20, the company’s total debt stood at INR 57.71 billion, net leverage at 2.25x (trailing 12 months) and interest coverage (operating EBITDA/gross interest expense) at 4.06x (FY19: 3.94x, FY18: 4.38x).

 

Integration of Unichem Acquisition: Torrent’s ongoing integration of the domestic businesses of Unichem Limited (acquired in December 2017) was in line with the guidance provided by the management for FY19. For Unichem, the turnaround was on track, as guided by management and was led by the implementation of cost synergies, productivity enhancement, in-clinic efficiency improvement, specialty focus and cross-selling initiatives. The field force productivity has also improved to the pre-acquisition levels of INR7.2 lacs/month as of end-June 2019 (FY19: INR6.2 lacs/month). The management also confirmed about Unichem turning cash accretive and is likely to strengthen over the subsequent quarters.

 

US Market Stabilises with New Approvals and Integration: In FY19, revenue from the US grew to INR15.89 billion (FY18: INR11.0 billion), driven by improvement in market share, volume gains and consistent launches (9 drugs). Torrent had 45 abbreviated new drug applications (ANDAs) pending for approval (including 11 tentative approvals) from the United States Food and Drug Administration (USFDA) at end-June 2019, which along with incremental filings are likely to support medium-term US revenue and operating profitability. Torrent’s research and development (R&D) expenditure is likely to be at 7%-8% of the consolidated revenue for FY20-FY21 (FY19: 7.0%, FY18: 7.7%).     

 

Liquidity Indicator - Adequate: Consolidated cash flow from operations surged to INR12.28 billion in FY19 (FY18: INR5.93 billion, FY17: INR8.52 billion) due to the improvement in profitability. The cash flow from operations is likely to continue to increase in FY20-FY21, leading to adequate liquidity for upcoming debt repayments (FY20: INR11.72 billion, FY21: INR13.97 billion). This is despite R&D spends as well as working capital requirements for the US product launches over FY20-FY21. At FYE19, Torrent’s working capital cycle improved to 197 days (FY18: 254 days) supported by reduction in inventory and receivable days.

 

Further, the liquidity is supported by high cash balances of INR11.09 billion at end-June 2019 as well as unutilised fund-based limits of INR16.75 billion (end-June 2019) for use in FY20. The agency expects the company’s liquidity options to mitigate refinancing risks, if any, in the near-to-medium term.

 

M&A Risk: The agency will assess the impact of mergers and acquisition (M&A) on a case-to-case basis and review the ratings accordingly. A higher-than-expected debt-funded acquisition can slowdown deleveraging and will be negative for the ratings.

 

Concentration and Regulatory Risks: The top 10 brand groups in the domestic markets for Torrent contributed around 40% to the consolidated revenue in FY19. Also, around 11% of the company’s domestic portfolio (including Unichem) 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 the price ceiling issued under Drug Pricing Control Order, which may inhibit the company’s growth in the domestic market. In the US, Torrent’s top 10 products contributed around 60% to revenue from the US market in FY19.

 

Torrent’s US-focused facilities at Indrad and Dahej have been classified as Official Action Indicated (OAI) by the USFDA in July and August 2019, respectively. While existing supplies to the US from these facilities are not impacted, new product approvals will be restricted till the OAI has been resolved. These facilities contribute to majority of the revenue from the US and pending ANDAs. The company has taken proactive initiatives and is submitting responses to the USFDA for early resolution of the OAI. The agency believes that there is limited impact on Torrent’s consolidated operating profitability due to absence of remediation cost and low size of product approvals expected in FY20.

Standalone Credit Profile:
Torrent reported revenue of INR57.62 billion in FY19 (FY18: INR42.44 billion) and operating EBITDA margins of 27.99% (21.38%). The company’s net leverage was 3.19x in FY19 (FY18: 5.98x) and interest coverage (operating EBITDA/interest expense) was 3.35x (3.09x).


RATING SENSITIVITIES

Positive: Successful integration of the acquired businesses, coupled with an improvement in the scale and profitability of the US business, leading to the net leverage reducing below 1.0x on a sustained basis will lead to a positive rating action.

Negative:
Delays in integration or lower-than-anticipated synergies from the acquired businesses, resulting in subdued profitability and/or large debt-funded acquisitions leading to the net leverage remaining above 2.0x beyond FY20 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 (Consolidated)

 

Particulars

FY19

FY18

Net revenue (INR billion)

76.72

59.50

Operating EBITDA (INR billion)

19.83

13.49

Operating EBITDA margin (%)

25.8

22.7

Operating EBITDA/Gross interest expense (x)

3.94

4.38

Net debt/Operating EBITDA (x)

2.51

3.18*

Total debt** (INR billion)

61.33

65.61

Free cash and liquid investments (INR billion)

12.3

13.59

Source: Torrent, Ind-Ra

Note: * FY18 Operating EBITDA adjusted to include full year of Unichem

** includes interest accrued but not due


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

25 April 2019

3 January 2019

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Stable

IND AA/Stable

Term loans

Long-term

INR23.5

IND AA/Stable

IND AA/Stable

IND AA/Stable

NCDs

Long-term

INR13.0

IND AA/Stable

IND AA/Stable

IND AA/Stable


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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121