The affirmation reflects ADRSPL’s continued modest EBITDA margin of 7.25% in FY20 (FY19: 13.3%) due to a decline in the top-line, followed by an increase in the cost of goods sold and personnel expenses. The return on capital employed was 0.10% in FY20 (FY19: 6.8%). The company’s absolute EBITDA too declined to INR104.28 million in FY20 (FY19: INR199.99 million). During 9MFY21, ADRSPL’s EBITDA as well as margin turned negative at INR66.06 million and 8.21%, respectively, owing to the lower capacity utilised in the manufacturing segment. Ind-Ra expects the margin to deteriorate further over the medium term, due to an increase the fixed expenses.

During FY20, ADRSPL’s credit metrics deteriorated with the gross interest coverage (operating EBITDA/gross interest expense) of 5.24x (FY19: 9.02x) and the net leverage (adjusted net debt/operating EBITDA) of 2.31x (0.52x), due to significant decline in the absolute EBITDA, coupled with increased borrowings. Ind-Ra expects the credit metrics to have deteriorated further in FY21, due to a further decline in the absolute EBDITA and increased bank limit utilisation.

Liquidity Indicator - Stretched: ADRSPL’s average maximum utilisation of its fund-based limits was 34.3% and that of its non-fund based limits was 16% during the 12 months ended February 2021. However, the utilisation increased to 77% at end-February 2021 due to increased capacity utilisation post January 2021. The company availed the Reserve Bank of India-prescribed moratorium over April-August 2020 and converted the interest amount payable as funded interest term loan and availed a guaranteed emergency credit line of INR38.10 million. The cash flow from operations turned negative to INR11.35 million in FY20 (FY19: positive INR310.31 million), due to a reduction in the EBITDA and negative changes in the working capital. This led to negative free cash flow from operations of INR98.96 million in FY20 (FY19: INR185.43 million). The cash and cash equivalents dropped to INR4.80 million in FY20 (FY19: INR85.97 million). ADRSPL’s net working capital cycle elongated to 92 days in FY20 (FY19: 56 days), primarily due to increased debtor days of 116 (88).

ADRSPL’s revenue declined but remained moderate at INR1,438.57 million in FY20 (FY19: INR1,503.27 million), majorly due to growth in the clinical research segment and formulation segment to 30.5% (26%) and 37.3% (35.1%) respectively. However, the revenue from the internal product segment declined to 19.1% in FY20 (FY19: 28.1%). ADRSPL had an order book of INR843.94 million at end-February 2021, to be executed over the short term. During 9MFY21, the company booked a revenue of INR804.82 million and during 11MFY21 (year-to-date February 2021), the revenue recorded was INR1,050 million. Ind-Ra expects the revenue to have declined yoy in FY21, due to the lackluster 1QFY21 performance. The revenue from the clinical research segment would have been steady in FY21 and is likely to be so in FY22 too, owing to ADRSPL’s long-term contracts with Mylan and Dr. Reddy's Laboratories (IND AA+/Stable). The revenue from the formulation and contract manufacturing segments is likely to have reduced in FY21 due to COVID-led disruption.

The pharmaceutical industry continues to be highly regulated by the U.S. Food and Drug Administration and thus, any adverse policy changes could affect the credit profiles of sector companies.