ICRA has reaffirmed the MAA and A1+ ratings assigned to Rs.1 billion debenture and Rs.2 billion short-term debt programme of Nicholas Pirmal India Limited (NPIL) subsequent to its decision to acquire Canere Actives and Fine Chemicals Private Limited (Canere) and amalgamate its wholly owned subsidiary Sarabhai Piramal Pharmaceuticals Limited – SPPL.

ICRA's rating reaffirmation is based on NPIL's dominant position in the domestic formulations industry, its high profitability, and strong cash accruals. While NPIL has established a leading position in several key therapeutic segments of the domestic formulations industry, it still derives an export turnover of only Rs.764 million (9 months ended December 31, 2003) accounting for 9.1 per cent of its total sales.

According to an ICRA press release, these acquisitions are expected to strengthen NPIL's exports and domestic formulations business. Canere will allow NPIL to increase its exports to global markets, and SPPL would bring in certain operational synergies for the domestic formulations business.

ICRA states that the acquisition of Canere, will allow NPIL to grow its API (Active Pharmaceutical Ingredients) business through custom manufacturing over the medium to long term. However, sales to regulated markets of USA and Europe would be subject to getting the necessary regulatory approvals. NPIL expects a speedy USFDA approval for this facility on account of its international quality, proximity to its existing USFDA approved facilities and common documentation & quality control procedures post acquisition. ICRA believes that NPIL's ability to carry out custom manufacturing of patented APIs for the regulated markets would crucially depend on its ability to enter into long term supply agreements with the patent-holder. Presently, NPIL is in the process of negotiating such supply contracts for APIs to be manufactured from the Hyderabad plant. The amalgamation of SPPL will allow NPIL to rationalize its marketing, selling and distribution network while strengthening its position in certain therapeutic areas (like NSAIDs, CNS/CVS and anti-infectives) in the domestic formulations segment. The full impact of operational benefits arising out of amalgamation of SPPL with NPIL would be observed during 2004-05.

During the 9 month period ended December 31, 2003, NPIL was able to register 20.1 per cent growth in net sales to Rs.8.37 billion. The increase in net sales of about Rs.1.4 billion was driven mainly by about Rs.550 million increase in formulations sales (13.7 per cent increase) and Rs.550 million increase in sale of bulk drugs. The exports grew by 234 per cent to Rs.764 million during this period over the corresponding period of 2002-03 due to the recent acquisition of Global Bulk Drugs and Fine Chemicals Limited. NPIL also registered marginal improvement in operating margins (OPBDIT/OI0) during the nine months as compared to 2003-04. While NPIL's gearing (Total debt/tangible networth) was moderate at 0.85 time as on March 31, 2003, its coverage indicators were strong, supported by net cash accruals of Rs.1.32 billion (about Rs.1.1 billion during the nine months ended 31/12/03) and NCA/total debt of 42.8 per cent during 2002-03.

With the Rs.1.16 billion acquisition of Canere, and amalgamation of SPPL, NPIL's debt is likely to increase by about Rs.1.86 billion. Canere had a total debt of Rs.778 million, as on December 31, 2003, in addition NPIL will issue redeemable preference shares aggregating to Rs.384 million. Though over the short term, ICRA expects an increase in gearing to enhance NPIL's financial risk, this is expected to be offset by the benefits brought in by the acquisition of Canere and SPPL. Moreover, high profitability, strong cash accruals and no major expansion plan would allow NPIL to reduce its debt levels and further boost its current strong coverage indicators over the medium term.