By Abhinav Aakash

India Ratings and Research (Ind-Ra) has upgraded Granules India Limited’s (GIL) Long Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. 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

-

-

-

INR1,848.8

IND AA-/Stable/IND A1+

Assigned

Term loans

-

-

July 2025

INR4,828 (reduced from INR5,352.3)

IND AA-/Stable

Upgraded

Fund-based working capital limits

-

-

-

INR6,592.2

IND AA-/Stable/IND A1+

Long-term rating upgraded, short-term rating affirmed

Non-fund-based working capital limits

-

-

-

INR850 (reduced from INR1,523.3.3)

IND A1+

Affirmed


Analytical Approach: The agency continues to take a consolidated view of GIL and its wholly owned subsidiaries – Granules Pharmaceuticals Inc. (GPI), Granules USA Inc. (GUSA) and Granules Europe Limited (GEL) - while arriving at the ratings. This is because of the strong operational, legal and strategic linkages among them.

KEY RATING DRIVERS

Strengthened Business Profile: The rating upgrade factors in the further strengthening of the GIL business profile as reflected in i) the continued increase in its already large scale of operations with revenues growing at CAGR of 17.1% over FY13-FY20 through new product launches, increased market share in existing products and increased capacities, ii) increased focus on operational efficiencies, the integrated nature of operations and process innovation that have resulted in GIL being one of the largest cost competitive supplier of the first-line-of-defence molecules such as paracetamol, metformin, ibuprofen, guaifenesin and methocarbamol to the regulated markets iii) the increased revenue contribution (as % of total sales) from the higher-margin finished dosage (FD) segment to 52.3% in FY20 (FY19: 47.1%, FY16: 33.4%), iv) the higher proportion of sales from the regulated markets of the US and Europe (FY20: 73%, FY19: 66%, FY16: 61%), v) no adverse regulatory action by the regulatory agencies on the facilities, vi) GIL’s exit in two JVs (Granules Omnichem Private Limited (‘IND BBB+’/Rating Watch Evolving) and Granules Biocause Pharmaceuticals Co.) which were non-core to its growth strategy resulting in cash inflows of INR1.9 billion net of taxes in FY2O and FY21 and vii) a continued decline in the promoter pledge to 3.5% at FYE21 from 12.5% at FYE19 resulting in increased financial flexibility at the promoter level.

The improvement in the product mix towards higher FD proportion resulted in the gross margin expansion to 50.7% in FY20 from 47.6% in FY16. The company intends to further strengthen its business profile through product launches in emerging segments that are medium volume and medium value products such as losartan, cetrizine and fexofenadine and in low volume and high value products that involve more complex research and development (R&D), niche molecules and differentiated release mechanisms from its US subsidiary GPI such as colchicine and butalbital APAP caffeine. This could help lower BIL’s dependence on top products as, during FY20, the company derived 84% of its revenue from the top five molecules (FY19: 83%; FY18: 80%). Despite the revenue concentration, Ind-Ra believes given that GPIL is among the top five players globally in its product segments, the first-line-of-defence nature of its products, diversified clientele and long-standing relationships with end customers mitigate this risk.

Financial Profile Strengthens: The upgrade also reflects the improvement in the consolidated financial position on account of the strong growth in revenue and EBITDA generation from expanded capacities. GIL's revenue grew to INR25.98 billion in FY20 (FY19: INR22.8 billion; FY18: INR16.8 billion), absolute EBITDA to INR5.25 billion (INR3.8 billion; INR2.8 billion) and EBITDA margins to 20.2% (16.9%; 16.5%). The absolute EBITDA remained supported by a favourable product mix, strong economies of scale and the maintenance of R&D expense at 4%-5% of sales over FY19-FY20. On the back of the healthy increase in EBITDA, strict control on the working capital cycle of the company and moderation in capex intensity to INR1.84 billion in FY20 (FY19: INR2.79 billion) the gross debt improved to INR8.93 billion (INR9.94 billion) and the net debt to INR7.07 billion (INR9.11 billion).

The strong expansion in margins and health revenue growth resulted in the expansion in the net asset turnover to 2.29x in FY20 (FY19: 2x; FY18: 1.57x; FY17: 1.42x) and increased return on capital employed of 15.0% (11.6%, 10.5%; 16.3%). As a result, the consolidated net adjusted debt/operating EBITDAR improved to 1.35x in FY20 (FY19: 2.37x; FY18: 3.13x). The strong gross interest coverage (operating EBITDAR/gross interest expenses + rental expenses) improved to 19.4x in FY20 (FY19: 13.5x) and is likely to exceed 20x in FY21 due to the improvement in absolute EBITDAR and flattish fixed expenses. The company will incur capex amounting to INR5.5 billion over FY21-FY22, which is likely to be entirely funded by internal accruals thus keeping debt at similar levels. Additionally, the gross borrowings will continue to be driven by the distribution to the shareholders in the form of share-buyback (INR1.75 billion including taxes during 1HFY21) and dividends of INR306 million in FY20 (FY19: INR306 million).

Healthy R&D Pipeline to Support Growth: GIL’s management expects the business to grow at steady 20%-30% over the next three-to-four years, driven by the healthy abbreviated new drugs application (ANDA) pipeline of 44 products for the FD business in the US of which, 26 were approved at FYE20 with 13 approvals in FY20. To support the growth for ANDA, the company filed 20 US drug master files (DMFs), 16 certificates of suitability and seven European DMFs till FYE20. During 1QFY21, GIL filed three ANDA/dossier in the US and European markets and received six ANDA approvals. The company expects to continue filing seven-to-eight ANDA and two-to-four dossiers annually. The growth will also be supported by the focus of the company to build a multi- active pharmaceutical ingredient (API) platform for strengthening integration with the formulation business with a focus on the oncology segment. During FY20, GIL filed its first oncology DMF in the US. The company intends to strengthen its product portfolio through multiple release mechanisms such as immediate release, extended release, delayed release, multiple unit pellet system and power and suspension dosages.

Liquidity Indicator - Adequate: GIL’s liquidity is supported by its adequate cash balances and liquid investments of INR1,859 million in FY20 (FY19: INR830 million). The company’s utilisation of its fund-based limits stood at 72% for the 12 months ended August 2020 and the utilisation of the non-fund-based limits stood at 16% for the 12 months ended August 2020. The company has well-spread debt repayments and expects to maintain a comfortable debt service coverage ratio of 3.5 over the medium term. GIL repaid INR598 million towards outstanding debts in FY20 and has repayments of INR971 million and INR986 million in FY21 and FY22, respectively. GIL’s net working capital days (FY20: 145 days, FY19: 150 days; FY18: 173 days) improved in FY20 owing to fewer receivables days (103, 108, 134) and increasing payables days (75, 62, 65).   The cash flow from operations margins (FY20: 13%; FY19: 9%; FY18: negative 7%) have been improving too, given the ameliorating net working capital days and higher EBITDA. This, coupled with moderating capacity additions (FY20: INR1.85 billion, FY19: INR2.79 billion, INR4.64 billion), has led to free cash flow turning positive (FY20: INR0.37 million; FY19: negative 0.9 billion; FY18: negative INR5.9 billion; FY17: negative INR0.65 billion). However, GIL has planned higher capex for FY21-FY22, which can impact the recent improvement in free cash flow. The company’s ability to control the working capital cycle to augment capacity utilisation is a key rating monitorable.

Regulatory Concerns and COVID-19 Update: Exports to regulated markets such as the US and Europe accounted for 73% of GIL’s revenue in FY20 (FY19: 66%; FY18: 63%) while the US alone contributed 53% to its sales. Thus, any adverse regulatory actions could affect revenue growth. GIL’s manufacturing facilities are compliant as on date, also its regulatory compliance record has been favourable consistently. Also, GIL has never received an official action indicated status on inspections. Recent the United States Food and Drug Administration inspections at GIL’s Gagillapur (February 2020) and Virginia, US facility (August 2019) resulted in two observations on each facility. According to the management, these observations are minor in nature and hence unlikely to be escalated to official action indicated status or any warning letter. During the COVID-19-led nationwide lockdown, GIL’s critical operations continued through at 25% utilisation levels in last week of March 2020, and gradually resumed to 85% in April 2020. In 1QFY21, GIL spent around INR130 million on account of the compliance to COVID-19 norms at its manufacturing sites; the company expects to spend on the same cause over the rest of FY21 too.

Standalone Performance: GIL’s standalone revenue rose 10% yoy to INR23,099 million in FY20 (FY19: INR20,984 million). Its absolute EBITDA surged to INR4,940 million in FY20 (FY19: INR3,325 million) and EBITDA margin expanded to 21.2% (15.8%). The interest coverage improved to 18.43x in FY20 (FY19: 11.74x). The standalone cash flow from operations stood at INR6,144 million in FY20 (FY19: INR3,136 million).


RATING SENSITIVITIES

Positive: Product launches leading to a major improvement in the business risk profile and growth in the scale along with profitability, leading to the consolidated net adjusted leverage reducing below 1x, all on a sustained basis, could result in a rating upgrade.

Negative: A decline in the operating profitability and/or higher-than-expected rise in the debt levels due to an increase in the working capital requirements, large debt-funded capex and acquisitions resulting in the consolidated net adjusted leverage exceeding and staying above 2x beyond FY21 could result in a rating downgrade.


COMPANY PROFILE

Established in 1991, Hyderabad-based GIL manufactures API, intermediates and finished dosages. The company has five manufacturing facilities in and around Hyderabad, one in Vishakapatnam and one in the US. All five facilities are USFDA approved.

FINANCIAL SUMMARY (Consolidated)

Particulars

FY20

FY19

Revenue (INR million)

25,986

22,792

EBITDA (INR million)

5,256

3,844

EBITDA margin (%)

20.2

16.9

Operating EBITDA/Gross interest expense (x)

19.4

13.5

Net debt/Operating EBITDA (x)

1.35

2.4

Total debt (INR million)

8,931

9,942

Free cash and liquid investments (INR million)

1,859

830

Source: GIL, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

22 August 2019

22 January 2019

7 March 2018

Issuer rating

Long-term

-

IND AA-/Stable

IND A+/Stable

IND A+/Stable

IND A+/Positive

Term loans

Long-term

INR 4,828

IND AA-/Stable

IND A+/Stable

IND A+/Stable

IND A+/Positive

Fund-based working capital limits

Long-term/ Short-term

INR 8,441

IND AA-/Stable/IND A1+

IND A+/Stable/IND A1+

IND A+/Stable/IND A1+

IND A+/Positive/IND A1+

Non-fund-based working capital limits

Short-term

INR850

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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names

  • Primary Analyst

    Abhinav Aakash

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001700

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121