By Poornima H

India Ratings and Research (Ind-Ra) has assigned Maithri Drugs Private Limited (MDPL) a Long-Term Issuer Rating of ‘IND BBB-’. The Outlook is Stable. The instrument-wise rating actions are given below:
 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limit

-

-

-

INR130.00

IND BBB-/Stable/IND A3

Assigned

Non-fund based facility

-

-

-

INR20.00

IND A3

Assigned

Term loan

-

September 2027

INR300

IND BBB-/Stable

Assigned

The ratings reflect MDPL’s healthy business profile, average EBITDA margins and robust credit metrics. Furthermore, Ind-Ra takes comfort from the unsecured loans that could flow from the promoter/advances from group entities to support the liquidity, if required.
 

KEY RATING DRIVERS

Healthy Business Profile: MDPL is a United States Food & Drug Administration (USFDA)-approved manufacturer of active pharma ingredients (APIs) and intermediates having portfolio of 65 products catering to therapeutic categories including anti-anaemics, anti-bacterial, anti-diabetic, anti-fungal, anti-hyperthyroidism, anti-inflammatory, anti-viral, antihypertensive, cardiovascular, among others. . It had 32 United States Drug Master Filings (US DMF) and nine Certificate of Suitability as of 1HFY22.

Exports
  accounted for 45% of the total sales as on H1FY22 (FY21:41%;FY20:41%), while the domestic sales contributed 55% of total sales in H1FY22(59%,59%)Exports comprised 41% of the total revenue in FY21 with a significant contribution from the regulated markets of the US (FY21:12%; FY20:13%), Turkey(FY21:4%; FY20:12%), and Canada (1HFY22:13%; FY21:nil).  among others, and domestically it is diversified pan-India.

Experienced Promoters:
Dr. Naga Raju, the promoter directors in MDPL has experience of over two decades in manufacturing of various pharmaceutical products.

Fungibility and Support from MSN group:
The promoter has provided non-interest-bearing unsecured loans of about INR239.07 million in FY20 (FY21: INR170.16 million). The management has confirmed to Ind-Ra, the pay-out of the unsecured loans would not be made till the tenure of the loan. MDPL is likely to undertake capex, which would also entail additional unsecured loan infusions.   

MDPL was earlier part of the MSN Group (group entity) with Dr. MSN Reddy being one of promoters of the company benefitted
  from the group’s marketing and analytical strategies.  In 2014, MDPL became an independent entity and  led by Dr. Naga Raju. The company’s long association with MSN group has aided in the longstanding ties with large-sized pharma companies, leading  to repeat orders.

Resilient Revenue Growth:
 MDPL revenue grew at a CAGR of  24% over FY18-FY21 to INR810.15 million  (FY20: INR716.6 million), attributed to a healthy product mix. Ind-Ra expects revenue growth of 5%-8% yoy in FY22 based on 1HFY22 numbers and outstanding order book. As of H1FY22, MDPL achieved revenue of INR456million and had an order book of INR169 million, to be executed by 4QFYE22. The revenue grew in FY21 majorly driven by the demand and increase in volume of its filed products.

Average EBITDA Margins: T
he EBITDA margins remained average and were stable at about 11% over FY20-FY21. Despite the volatility in the raw material cost and high dependence on China for certain raw materials, MDPL achieved an EBITDA margin of 15% as of 1HFY22.  Ind-Ra expects the margins to remain stable in FY22. The return on capital employed stood at 13% in FY21 (FY20: 15%).

Robust Credit Metrics: 
Ind-Ra expects MDPL’s net leverage to be in the range of 1.5x-2.0x in FY22, given the drawdown for the phase 1 expansion expected  to begin in 4QFY22. MDPL is expanding capacity to 350 kilo litres from 108 kilo litres in three blocks. Currently, capex is being undertaken for only block 1 at a cost of INR421.4million. MDPL has received a sanction of INR300 million for the capex. The company’s total debt increased to INR295 million at FYE21 (FYE20: INR215 million), comprising INR175 million of unsecured loans (INR133 million) and working capital limits of INR120 million (INR82 million), driven by higher utilisation of the working capital limits. MDPL’s net leverage including unsecured loan (total adjusted net debt/operating EBITDA) stood at 3.1x in FY21 (FY20: 2.6x) and net leverage excluding unsecured debt stood at 1.23x (0.91x), while interest coverage (operating EBITDA/gross interest expense) remained strong at 6.0x (9.0x).

Presence of Hedging Mechanism:
MDPL imports on an average 40% of its raw materials from China and procures the remaining from domestic suppliers in India. Since exports account for an average 42% of the company’s revenue, the forex risk is naturally hedged to some extent and the balance is hedged through forward contracts.

Liquidity Indicator - Stretched: MDPL
’s average peak use of the fund-based limits  was 98% for the 12 months ended September 2021. Its cash and cash equivalents stood at INR9.53 million at 1HFYE22 (FY21: INR5.51 million). The cash flow from operations turned positive, although was low at INR8.63 million in FY21 (FY20: negative INR10.30 million) on back of improvement in absolute EBITDA, despite elongated net cash conversion cycle. MDPL’s free cash flows remained negative over FY18-FY21 (FY21: negative INR45.9million, FY20: negative INR91.2 million) due to the capex being undertaken by the company to improve its research and development, and technical know-how to launch new products in the bulk drugs segment. Ind-Ra takes comfort from the advances and unsecured loans that could flow from the group entities to support the liquidity, if required.  The net cash conversion cycle elongated to 201 days in FY21 (FY20: 126 days) due to the high inventory holding period of 227 days (178 days) and a decline in the creditors period to 85 days (126 days),  partially offset by a decline in the receivable period to 59 days (73 days).

Regulatory Concerns:
 The moderate entry barriers in intermediate and API manufacturing business could affect MDPL’s operating performance. Any decline in demand from the company’s counterparties, in the event of market share being absorbed by a new entrant or backward integration by the existing pharma companies, could impact the company’s operating as well as financial performance. Moreover, MDPL’s manufacturing facilities are Good Manufacturing Practices and USFDA compliant as on date. MDPL has a clean track record with the USFDA and other regulatory agencies. However, the pharmaceutical industry is highly regulated; thus, any adverse policy change could affect the company’s credit profile.


RATING SENSITIVITIES

Positive:  Sustenance of healthy revenue growth while maintaining operating profitability above 11% and a further improvement in the working capital cycle, leading to an improvement in the liquidity profile could, all on a sustained basis will be positive for the ratings.

Negative
: Decline in revenue and operating profitability, leading to deterioration in the liquidity profile and/or a lower-than-expected support from promoter/advances from group companies resulting in deterioration in the credit metrics, all on a sustained basis, could be negative for the ratings.


COMPANY PROFILE

Established in 2013 in Hyderabad, MDPL  manufactures bulk drugs catering to a broad range of therapeutic categories including anti-anaemics, anti-bacterial, anti-diabetic, anti-fungal, anti-hyperthyroidism, anti-inflammatory, anti-viral, antihypertensive, cardiovascular, among others.


FINANCIAL SUMMARY

Particulars

1HFY22 (Provisional)

FY21 (Provisional)

FY20

Revenue (INR million)

457.99

810.15

716.60

EBITDA (INR million)

67.97

93.07

79.20

EBITDA margin (%)

14.84

11.49

11.05

Gross interest coverage (x)

8.67

6.03

9.00

Net leverage (x)

2.66

3.11

2.59

Source: MDPL; Ind-Ra



COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Fund-based working capital facility

Low

Non-fund based facility

Low

Term loan

Low


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. 

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.

Applicable Criteria

Analyst Names

  • Primary Analyst

    Poornima H

    Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai - 600017
    +91 44 43401723

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121