By Krishnanath Munde

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

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR4,500

IND AA-/Stable

Affirmed

Non-fund-based limits*

-

-

-

INR4,400

IND A1+

Affirmed

Proposed fund-based limits**

-

-

-

INR7,500

IND AA-/Stable

Assigned

Proposed non-fund-based limits**

-

-

-

INR2,100

IND A1+

Assigned

*Non-fund-based limits of INR4,400 million from Bank of India consists of a standby letter of credit of INR2,250 million and other non-fund-based limits of INR2,150 million

**Provisional rating of the proposed bank facilities has been converted to final rating as per Ind-Ra’s updated policy. This is because the agency notes that debt seniority and general terms and conditions of working capital facilities tend to be uniform across banks, and are not a rating driver. 

Analytical Approach: To arrive at the ratings, the agency continues to take a consolidated view of GPL and its subsidiaries, since the subsidiaries are engaged in a similar business of manufacturing, research and sales of formulations and active pharmaceutical ingredients (APIs).

KEY RATING DRIVERS

Continued Rise in Revenue; Healthy Growth Prospects in India and US: GPL’s revenues from the India formulations business (31% of sales) grew 15.3% yoy to INR32.02 billion in FY20 (FY19: up 10.4% yoy), ahead of the 11% growth reported by the Indian pharmaceutical industry. Notwithstanding the near-term impact of the pandemic, the company’s long-term prospects remain intact, with a strong market share in its focus therapy areas of respiratory (5.1%), cardiovascular (4.7%) and dermatology (8.9%). GPL has significantly improved its market positioning in India, ranking 14th (FY10: 26th), due to its strong focus on building its brands and reputation.

 

The US formulations business’s (30% of sales) revenue remained almost flat at INR31.4 billion in FY20 (FY19: decline of 2.1%). However, the US business is likely to grow from FY21, supported by a moderation in pricing pressure and new launches. In FY20, GPL’s US business declined, as its derma therapy segment’s revenue fell by 20% yoy due to lower sales of three products - Mupirocin Cream, Atomoxetine hydrochloride and Calcipotriene cream. GPL has 44 abbreviated new drug applications (ANDAs) pending for approval, which provide revenue visibility, though the extent of the same would depend upon the pricing environment and the competition at the time of the approval/launch. Ind-Ra expects the consolidated revenue growth momentum to be sustained in FY21 (FY20: 8% yoy; FY19: 9% yoy), led by the growth in the India market, which would be supported by API and the emerging markets business. 

 

Diversified Business Profile: GPL derives more than 70% of its revenue and profitability from its key businesses of India formulations, US formulations and global API (10% of sales).  GPL has a strong competitive position in chronic therapies in the India formulations business, which offers higher profitability. The rest of the world (12% of sales), Europe (12% of sales) and Latin America (5% of sales) markets yield relatively low margins.

 

Credit Metrics Remain Comfortable; Stable Profitability: GPL’s gross debt increased to INR48.7 billion at end-FY20 (end-FY19: INR44.5 billion) on account of rupee deprecation, as 90% of the borrowing is in the form of forex-denominated debt.  The net debt increased to INR37.6 billion in FY20 (FY19: INR35.1 billion). Despite this, GPL maintained its net leverage (net debt/operating EBITDA) at 2.2x in FY20 (FY19: 2.2x), in line with Ind-Ra’s expectations, owing to an increase in the absolute EBITDA to INR16.9 billion (INR15.9 billion). The interest coverage remained healthy but declined to 4.5x in FY20 (FY19: 4.7x) owing to a marginal increase in interest expenses.

 

Despite an increase in raw material expenses and continued R&D expenditure (FY20: 12.7%; FY19: 13.2%), the EBITDA margin was almost stable at 16.0% in FY20 (FY19: 16.1%) due to healthy revenue growth in its key markets.

 

GPL’s profitability would depend on its ability to monetise its innovative R&D assets, which have been carved out into a separate US-based entity, Ichnos Sciences Inc.; this could lower the cash outflow towards the subsidiary. However, the continued drag on the overall profitability due to investments in the innovative molecules would remain a key monitorable. GPL had intended to raise equity for its API business, but it has put the plan on hold in view of the strong business tailwinds. Ind-Ra expects GPL’s credit metrics to improve in FY22, driven by the strong performance across segments, healthy EBITDA generation and moderate capex.

 

New Molecule Development on Track, Monetisation Key: GPL generated a healthy return on capital employed (RoCE) of 26% in FY20 (FY19: 29%), excluding the investments made towards the new molecule development programme, which comprises seven new molecular entities. Annually, GPL has been spending nearly 12%-13% of its revenues (FY20: INR13.5 billion, FY19: INR13 billion) on R&D; of this, nearly 60% has been directed towards the innovative molecules.  Given the large upfront expense and delayed returns, the investments have been a drag on the overall RoCE of GPL. To lower the impact of these investments on the balance sheet leverage, GPL is actively seeking partners to out-license certain R&D molecules; if the plan materialises, it could reduce the company’s R&D spends and support its operating profitability in the medium term.  The innovative pipelines are subject to acceptance from regulatory authorities, and the approvals might get delayed, which could lead to delays in the targeted commercial launch. GPL is looking to raise equity for Ichnos Sciences. If the company is able to raise funds, it could improve the leverage ratio over the medium-to-long term. The funds raised in Ichnos Sciences might be used to fund the development of its pipeline and for future growth plans. 

 

Liquidity Indicator - Adequate: During the 12 months ended June 2020, GPL’s average utilisation of its fund-based working capital limits was 22%., The cash flow from operations stood at INR9.0 billion in FY20 (FY19: INR8.5 billion).  Ind-Ra expects the same to improve in FY21 on the back of revenue growth and EBITDA margin expansion. The free cash flow turned positive at INR221 million in FY20 (FY19: negative INR5.5 billion), as the capex decreased due to the completion of the facility expansion at the Monroe facility in the US. The free cash flow is likely to remain positive during FY21-FY23 owing to lower capex. Ind-Ra has factored in capex of INR8 billion per year over FY21-FY23 (FY20: INR9.3 billion). GPL has not availed the Reserve Bank of India-prescribed debt moratorium. The company had cash balances of INR11.1 billion at end-FY20 (FY19: INR9.4 billion) and has modest repayments of INR3.8billion in FY21. Ind-Ra expects GPL's interest and cash coverage ratios to be healthy during FY21-FY23. 

 

Elevated Refinancing Risk, Partly Mitigated by Tie-ups: GPL has significant maturities of INR17.5 billion and INR13.9 billion in FY22 and FY23, respectively, which jointly account for 65% of the gross debt. The bulk of the repayments are towards the senior notes of USD200 million and foreign currency convertible bonds (FCCBs) of USD113.5 million (excluding accrued interest, due in June 2022). The company is in the advanced stages of tie-ups with the lenders for meeting the FY22 repayment obligations for the senior notes. The management expects to make the necessary arrangements and the same is likely to be completed by 3QFY21. For the FCCBs, the company has revolver facilities available at its Swiss subsidiary (Glenmark Holding S.A), which could be drawn upon to retire the bonds on the exercise of put options by investors. Ind-Ra draws comfort from GPL’s past track record and its demonstrated ability to refinance its obligations.

As a backup strategy, the company also has plans to monetise certain non-core assets (core focus segments include dermatology, respiratory and cardiology in the domestic business), which could provide the additional cash. During, FY19-1HFY21, GPL divested its non-core pain management portfolio, VWash brand and the gynaecology business, in the domestic market. The management also intends to spread out the maturities of the debt over the long term, thereby lowering the high refinancing risk. Additionally, Ind-Ra draws comfort from GPL’s cash balances of INR11.1 billion at end-FY20 and the company’s ability to generate EBITDA of nearly INR18-INR20 billion each year.

 

Regulatory Risk: GPL’s ratings continue to reflect the regulatory risk emanating from the possibility of price control, with over 10% of India sales under drug price control order, and the United State Food and Drug Administration’s (USFDA) regulatory scrutiny of the company’s manufacturing facilities. GPL’s Baddi plant received a warning letter from the USFDA in October 2019. GPL has already submitted a corrective and preventive action plan to the USFDA, and continues to have discussions with the regulator on the same. The site accounts for 6%-7% of sales for the US market and it does not have any major ANDA filings. USFDA approval for GPL’s specialty product, Ryaltris, has been pending due to the non-compliant status of the Baddi formulation facility. However, Glenmark’s track record of resolving USFDA issues has been good. GPL has been named as one of the defendants in a US drug-price fixing lawsuits. Ind-Ra will treat this as an event risk, as there is a lack of visibility on the crystallisation of potential liabilities for GPL.  

Standalone Profile: GPL reported revenue of INR67.13 billion in FY20 (FY19: INR63.04 billion), operating EBITDA margins of 19.4% (21.1%), net leverage of 2.7x (2.2x) and the interest coverage of 5.1x (5.9x).


RATING SENSITIVITIES

Positive: A substantial improvement in the operating EBITDA, leading to a sustained improvement in the free cash flow, resulting in the net adjusted leverage falling below 1.5x, on a sustained basis, could lead to a positive rating action.

Negative: An increase in the net debt levels due to unplanned capex/acquisition or a decline in the operating EBITDA margins, resulting in the net adjusted leverage exceeding 2.5x, on a sustained basis, could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 1977, GNP is an Indian pharmaceuticals company, producing branded and generic formulations, APIs, with a presence in over 60 countries. Glenmark has 16 facilities across formulations and APIs in five countries. Its generics pipeline for the US business is focussed on filings in immediate release, dermatology, hormones and injectables.

FINANCIAL SUMMARY

 Particulars

FY20

FY19

Revenue (INR billion)

   1,06.4

       98.7

EBITDA (INR billion)

       16.9

       15.9

EBITDA margin (%)

            16.0

            16.1

Total gross debt (INR billion)

       48.7

       44.5

Net adjusted leverage (x)

            2.21

            2.2

Gross adjusted coverage (x)

            4.50

            4.74

Source: Glenmark, Ind-Ra

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

30 July 2019

21 June 2018

15 March 2017

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

Fund-based cash credit limits

Long-term

INR12,000

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND AA-/Positive

Non-fund-based limits

Short-term

INR6,500

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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

    Krishnanath Munde

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 44 43401768

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121