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Akums Drugs & Pharmaceuticals Limited: Long-term rating upgraded to [ICRA]AA(Stable); short-term ...

Posted: 27 Nov 2024

Akums Drugs & Pharmaceuticals Limited: Long-term rating upgraded to [ICRA]AA(Stable); short-term rating reaffirmed While assigning the credit ratings,ICRA has taken a consolidated view ofAkums Drugs & Pharmaceuticals Limited (ADPL) andits key subsidiaries(together referred to as the Akums Group), Pure & Cure Healthcare Private Limited (PCHPL), Malik Lifesciences Private Limited (MLPL) and Maxcure Nutravedics Limited (MNL), given the common management and significant operational and financial linkages amongthem.The rating action for ADPL factors in the strengthening of its financial risk profile,aided byequity infusion from its recently concluded initial public offering (IPO), healthy internal accrualgeneration and steady revenue growth. ADPL raised ~Rs. 680 crore of funds through a fresh issue,resultinginexpansion of its net worth(also expanded from removal of put option liability), reduction in its relianceondebtand strengthening of its debt protection metrics. Coupled with its strong performance in the CDMO1business and improvement in its domestic branded generics and exports businesses, offsetting the relatively muted performance in the API2and trade generics businesses, this has strengthenedthe credit profile of the company.ADPL’s consolidated revenue grew by 14.3% to Rs. 4,180.7 crore in FY2024 and by 5.1% to Rs. 1,019.1 crore in Q1 FY2025on a YoY basis. Moreover, ADPL’s operating profit margin3(OPM)also improved to 11.6% in FY2024 and 12.2% in Q1 FY2025 from 8.2% in FY2023followed by some improvement in the OPM from its CDMO and marketing businesses and reduction of operating losses from its API business.This resulted in healthy cash accrualsandreduction in the leverage levels in FY2024, as reflected bytotal debt/OPBDITA of 1.2 times as on March 31, 2024against 2.1 times as on March 31, 2023. Moreover, out of the equity of Rs. 680 crore,raised through the IPO, ADPL would utilise Rs. 387 crore shall be utilised towards partial repayment/prepaymentof existing debt,leading to a further improvement in its coverage and leverage indicators.The ratings also continue to factor in ADPL’s strong market position in the CDMO industry, its sizeable manufacturing capacities and wide 1Contract development and manufacturing operations2Active pharmaceutical ingredients3Excluding the impact of fair value changes www.icra .inPage|2product portfolio. Leveraging on the same, the company has beenable to establish long relationships with its customers, which include reputed domestic and multinational pharmaceutical companies.The ratingscontinue to remain constrained by vulnerability of ADPL’s profitability to volatility in raw material prices and competition in the industry. Additionally, the company has made sizeableinvestments (including loans and advances) in its marketing (includes trade generics and domestic sales/exports of branded formulations) and API businesses, wherein it is yet to generate material returns. While the API business has remained loss makingin the recent years, there has been a steady reduction in the same with scaling up of revenues.ADPL has also consolidated the trade generics business,which has resulted in some improvement in the OPM from this segment.Increasein profitability of its API and marketing businesses would remain key monitorables.ADPL also continues to remain exposed to legal and regulatory risks, including scrutiny by regulatory agencies, product liability matters, inclusion of more drugs under NLEM4and other commercial matters.ICRA has also notedtwosummonsesreceived by the company and/or its Directorsfrom the Directorate of Enforcement (ED) in the recentyears. While ED has not taken any adverse action in these matters, ICRA would continue to monitor the developmentstherein. The Stable outlook for the long-term rating reflects ICRA’s expectation that the company willcontinue to benefit from its established business positionand long relationships with its key customers, enabling it to generate healthy internal accruals.Key rating drivers and their descriptionCredit strengthsLeading contract manufacturer in generic pharmaceutical industry–ADPL is a leading contract manufacturer, having a share of 30.2% by valuein the Indian domestic CDMO market5.It also has a 10.0% shareby value in the total addressable Indian domestic CDMO market. The company has 12formulations manufacturing units with acombinedproduction capacity of around49.6 billion units per annum,having commercialised more than 4,000 formulations across more than 60 dosage forms.As of March 31, 2024, Akums obtained 1,448 trademarks across various dosage forms and formulations. Further, as of March 31, 2024, Akums secured 927 DCGI approvals and five patents.In addition to the contract manufacturing business, the Akums group is also increasing its footprint in the marketing business, with rising presence in exports and branded generics and is also present in the trade generics and API businesses. While the current scale of thesebusinesses is lower, relative to the Group’s overall revenues, the same has healthy growth opportunities over the long term.Diversified customer profile,which includes reputed pharma companies–The Akums Group enjoys good relationships with its customers,includingseveral established domestic and multinational pharmaceutical and wellness companies. It has a diversified customer base,serving more than 1,500 customers in FY2024and 38 out of its 50 largest customers in FY2024 were havingrelationship of more than five years with the company. Its top 10CDMO clients contributed 39.3% to its revenues from the CDMO business in FY2024(38.9% in FY2023),reflecting adequate customer diversification.Healthy financial profile–ADPL’s revenue grew by 14.3% to Rs. 4,180.7 crore in FY2024 from Rs. 3,656.6 crore in FY2023 and its OPM improved to 11.6% in FY2024 from 8.2% in FY2023,leading to a healthy improvement in its cash accruals during the year. Further, ADPL concluded its IPO in August 2024 with a primary issue size of ~Rs. 680 crore.In line with the objectives of the offer, proceeds worth Rs. 387 crore are expected to be used for partial repayment/ prepayment of the Group’s debt,which will result in a significant improvement in its leverage and coverage indicators in the current fiscal.Moreover, with expectations of continued strong cash accruals, supported by steady performance of its CDMO business, ADPL is likely to continue to maintain a comfortable capital structure, healthy debt coverage indicators and an adequate liquidity position.