ICRA has reaffirmed A1+, indicating highest safety in the short term, to the Rs. 100 million commercial paper/short term debt programme of Shasun Chemicals and Drugs Limited (SCDL). The reaffirmation of the rating takes into account the established track record of SCDL in supplying bulk drugs to major pharma companies in both regulated and un-regulated markets, favourable prospects for its contract manufacturing business model, steps taken to diversify the revenue streams, low financial risk and high financial flexibility. The rating also considers the high dependence on the mature molecules, pricing pressure in its bulk drugs business and new project risks, stated a press release.
SCDL is an 'active pharma ingredient' (API) manufacturer. Major drugs manufactured by the company include Ibuprofen, Ranitidine and Nizatidine which accounted for 54 per cent, 11 per cent and 14 per cent of the company's turnover of Rs. 2.34 billion in 2002-03. Exports constituted bulk (68 per cent) of its sales. Ibuprofen is a relatively old molecule which is used in 'Pain Management' applications such as for curing headache, tooth ache, muscular ache, and arthritis. Ranitidine and Nizatidine are used in "Gastro Intestinal" segment for anti-ulcer application. Besides these drugs, the company derives revenues from contract research and manufacturing (CRAM) from its MNC pharma clients. SCDL's
Ibuprofen, Ranitidine and Nizatidine plants are US FDA accredited which enables it to supply drugs to a number of regulated and un-regulated markets. The company achieved sales and net profit of Rs. 1.99 billion and Rs. 136 million respectively in the first nine months of 2003-04.
Despite stiff competition from newer molecules, the market growth rate of Ibuprofen and Ranitidine has been steady due to their price competitiveness. However, both these drugs are price controlled in India and their prices have been depressed because of excess capacity in the industry. SCDL has been able to offset this risk by exporting larger quantities of the drugs to the regulated markets where the realisation is higher than in the domestic market. However, the premium over domestic price has been declining over the years and is a cause for concern.
SCDL's sales have grown by 12 per cent in the first nine months of 2003-04 as compared with the same period last year. The operating margin (OPBDIT/OI) has shown improvement to 18.1 per cent from 17 per cent in 2002-03 due to upward revision in DPCO price of Ibuprofen and higher exports sales of Ranitidine base. The company's interest costs have also sharply declined due to prepayment of high cost debt with lower cost foreign currency debt. Higher operating profit, lower interest charges and taxes have resulted in comfortable cash generation. During the current fiscal, the company also made a preferential allotment of equity to a private equity fund that saw an equity infusion of Rs. 222 million. Post equity infusion, the gearing is estimated to have declined to 0.60 times from 1.03 times of March 31, 2003. The company's return on capital employed and coverage indicators continue to be comfortable. The company also enjoys high financial flexibility that would enable it to draw funds at a short notice from its lenders, which is a comfort factor to its liquidity.
SCDL is in the midst of a slew of new projects involving a capital expenditure of Rs. 1.35 billion to be incurred over the period 2003-06. The investments are on a new multi product plant, a formulation plant and upgradation of R&D, quality control and effluent treatment facilities.
The capex is being funded with a mix of debt, internal accruals and fresh equity. Consequent to these projects, ICRA expects the gearing and return on capital employed to show modest deterioration over the short to medium term.
Going forward, over the short to medium term, ICRA expects SCDL's dependence on old molecules to decline consequent to faster growth in revenues expected from new drugs such as Ibuprofen derivatives, excipients such as hydroxy propyl methyl cellulose phthalate (HPMCP), CRAM besides entry into formulations under contract manufacturing. Revenues from new drugs, though lower in value are expected to fetch higher margins as they are targeted exclusively at customers in regulated markets. This should offset to some extent further pressures on realisations in its traditional products.