By Abhinav Aakash

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

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits*@

-

-

-

INR3,000 (reduced from INR4,000)

IND AA-/Stable/IND A1+

Assigned

Proposed non-fund-based limits*#

-

-

-

INR2,000 (increased from INR1,000)

IND AA-/Stable/IND A1+

Assigned


* The limits are fungible between fund-based and non-fund-based

@ The final rating has been assigned to on the receipt of executed financing documents by Ind Ra.

# The provisional rating of proposed short-term facility has been converted to final rating as per India ratings updated policy. The long-term rating is unallocated.

Analytical Approach: Ind-Ra has considered the standalone profile of GLS for the ratings but has notched them up on account of GLS’s strong operational and strategic linkages and moderate legal linkages with its parent Glenmark Pharmaceuticals Limited (GPL; ‘IND AA-’/Stable).

KEY RATING DRIVERS

Established Market Position with Well-diversified Product Portfolio and Customers: GLS continues to have strong relationships with the top 20 global generic pharmaceutical companies based in the US, Europe and Japan,  which provide revenue visibility. The company’s major active pharmaceutical ingredients (API) and intermediates have market leadership positions. GLS’s strong competitive position with its customers is attributed to its ability to develop niche chemistry/synthetic pathway and the low cost of operations for the products manufactured. The top 10 products contributed 40% to the revenue in FY20 (FY19: 33%). Although GLS does not have long-term contracts, its relationship with most clients extends for over five years. The contribution of the company’s top 10 customers to its sales grew marginally to 28.2% in FY20 from 26.5% in FY19 with no single customer contributing over 10%. At end-August 2020, GLS had filed over 399 drug master filings (DMFs) across various markets majorly in the US, Europe, Brazil, Canada, Japan, Russia and others. At end-2Q20, GLS had 109 active DMFs in the US alone.. 

 

Healthy Operational Performance: GLS’s EBITDA margins remained healthy even though they declined to 30.7% in FY20 as against 33% in FY19 due to the unavailability of raw materials, the subsequent increase in the procurement cost and COVID-19-led business disruptions. The healthy margins are a result of the company’s presence in high complexity segments that have low competition such as anti-hypertensives. Also, GLS’s average EBITDA margin over FY16-FY20 were 32.9%, higher than its peers’. The company’s revenue was INR15.3 billion in FY20 (FY19: INR8.8 billion). The  revenue growth  in FY21 will be supported by the China Plus One sourcing strategy being adopted by the players globally, the continued traction in new GLS’s DMF filings and its increased market share in select products. The management expects to file six-to-eight DMF every year. Additionally, the company could consider entering new areas such as oncology and peptides to support growth and margins. 

 

Healthy Credit Profile: GLS’s ratings factor in its strong free cash flow generation over FY19-FY20 that has resulted in net negative debt. Moreover, as the company has not undertaken any sizeable capex for any of its API facilities during FY19 and FY20, it has no long-term debt. The last sizeable greenfield capex was completed five years ago at Dahej. Most of the capex post FY16 has been towards maintenance, de-bottlenecking and the addition of lines; it averaged INR0.5 billion-0.6 billion each year. GLS’s capacity utilisation stood at 80%-85% at FYE20. The company may set up a greenfield facility in the medium-to-long term, depending on its capacity requirements, which is likely to be funded through internal accruals. At FYE20, GLS’s net debt was negative. GLS’s net leverage (net debt/operating EBITDA) is likely to remain under 1.5x over the near-to-medium term as its debt structure is likely to be dominated by working capital debt. Ind-Ra will continue to monitor the working capital situation as the same will impact the cash flow generation. 

 

Liquidity Indicator - Adequate: GLS’s liquidity is supported by the available cash of INR100 million at FYE20 (FYE19: INR20 million) and the INR3 billion fund- and non-fund-based limits sanctioned to the company during September 2020.  The utilisation of the non-fund-based limits was around 60% over the 12 months ended September 2020. GLS’s liquidity is further supported by the healthy cash flow from operations of INR1,950 million in FY20, which Ind-Ra expects GLS to increase to INR3,361million in FY21 due to the likely improvement in the capacity utilisation and improved working capital. The healthy cash flow from operations, combined with the moderate capex requirements of INR1.5 billion-1.75 billion over FY21-FY22, coupled with no long-term debt obligations, are likely to result in in healthy free cash flow generation that could be used either to pay dividends or repay the liability from GPL. GLS incurred maintenance capex of INR0.51 billion in FY20 (FY19: INR0.09 billion), that was funded internally. GLS did not avail the Reserve Bank of India-prescribed moratorium.

 

GLS’s liquidity remains tempered by its slightly long albeit improving working capital cycle that stood at 55% of sales in FY20 (FY19: 75%).

 

Strong Linkages with Parent: GLS sells 30%-35% of its products to GPL which accounts for around 40% of GPL’s raw material requirements and contributed about 10% to GPL’s consolidated revenue in FY20. Both the entities have two common directors. GLS has INR3 billion of fund-based/non-fund-based limits for which GPL has provided a corporate guarantee. GLS has a current financial liability towards GPL in the form of payable to parent against the business sale for an amount equivalent to INR10,591  million in FYE20 (FYE19: INR11,621 million). During FY20, GLS up-streamed INR1,030 million to the parent in the form of a reduction in liability towards payable against a business sale and INR335  million in the form of interest on this liability. Though the possibility of stake sale exists, GPL will continue to hold a majority stake in GLS and the corporate guarantee on the bank facilities is also likely to continue. Hence, Ind-Ra believes the linkages with the parent will continue even if GPL were to divest a part stake in the company.

 

Regulatory Risk: GLS has four facilities for manufacturing APIs and intermediates in India, of which, three located at Ankleshwar, Dahej and Mohol  are United States Food and Drug Administration approved. All these facilities have been compliant with United States Food and Drug Administration as on date. However, any negative regulatory event can have an adverse impact on the company’s operations.


RATING SENSITIVITIES

Positive: The further strengthening of GLS’s linkages with the parent, coupled with an improvement in the scale of operations, while maintaining credit metrics, will be positive for the ratings.

Negative: Any weakening of GLS’s linkages with the parent, deterioration in GLS’s credit profile and liquidity could lead to a negative rating action.


COMPANY PROFILE

GLS was erstwhile the API business unit of GPL. The API business was transferred to a 100% subsidiary of GPL since 1 January 2019. GPL’s API business was established in 2003 for captive consumption and the export sale of APIs. At end-August 2020, GLS had filed over 399 DMFs across the various markets majorly in the US, Europe, Brazil, Canada, Japan, Russia and others.

FINANCIAL SUMMARY 

Particulars

FY20

FY19

Revenue (INR million)

15,373

8,864

EBITDA (INR million)

4,720

2,477

EBITDA margins (%)

31

28

Interest expense (INR million)

335

6

Gross debt (INR million)

0.21

0.21

Net leverage(x)

-0.02

-0.01

Interest coverage (x)

14.1

409.5

Source: GLS



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

27 November 2019

Issuer rating

Long-term

-

IND AA-/Stable

IND AA-/Stable

Fund-based limits

Long-term/Short Term

INR3,000

IND AA-/Stable/IND A1+

Provisional IND AA-/Stable

Proposed non-fund-based limits

Long-term/Short Term

INR2,000

IND AA-/Stable/IND A1+

Provisional 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.

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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