Press Release

Cadila Pharmaceuticals Limited March 18, 2019 Ratings Amount Facilities Ratings1 Rating Action (Rs. crore) 519.80 CARE A; Stable Long-term Bank Facilities Reaffirmed (reduced from 582.60) (Single A; Outlook: Stable) CARE A1 Short-term Bank Facilities 60.00 Reaffirmed (A One) CARE A; Stable/ CARE A1 Long-term / Short-term 420.13 (Single A; Outlook: Stable/ Reaffirmed Bank Facilities A One) 999.93 (Rupees Nine Hundred Ninety Total Nine crore and Ninety three lakh only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Cadila Pharmaceuticals Limited (Cadila) continue to derive strength from its experienced management and established track record in the pharmaceutical industry with recognized position in the domestic formulation market, strong product portfolio with adept marketing setup and well equipped Research & Development (R&D) facilities along with its manufacturing facilities conforming to various regulatory authorities. The ratings are also underpinned by improvement in its profitability during FY18 (refers to period from April 1 to March 31) and H1FY19. The ratings, however, continue to be constrained by revenue concentration towards few brands and therapeutic segments, its presence in price controlled formulation business and highly competitive Active Pharmaceuticals Ingredients (API) segment along with regulatory risk and foreign exchange fluctuation risk. The ratings further continue to be constrained on account of Cadila’s high exposure towards subsidiary/group companies along with extension of performance and corporate guarantees to subsidiaries, despite healthy liquidity at foreign subsidiary level. The ratings are also constrained on account of its investments in subsidiary/group companies and high leverage arising primarily from continual drawal of term loans to fund its on-going capex plans. Increase in scale of operations through expanding geographical reach along with improvement in operating profitability and leverage would be the key rating sensitivities. Further, any significantly more than envisaged debt funded capex/ acquisition/ expenditure and any further issuances of performance or corporate guarantees to the lenders of subsidiaries or group companies would remain a key rating monitorable.

Detailed description of the key rating drivers Key Rating Strengths Experienced and professional management group: Dr. Rajiv Modi is the Chairman and Managing Director of Cadila. He holds B. Tech (Chemical) from IIT Bombay and has done his M.Sc. in Biochemical Engineering from University College, London and PhD in biological science from the University of Michigan, Ann Arbor, USA. The promoters and promoters’ group have rich experience in the field of pharmaceutical industry. The operations of Cadila are supported by well- qualified and experienced management personnel.

Established position in the Pharmaceutical Industry: During FY18, formulations and API segments contributed around 77% and 21% to its total sales respectively as against 74% and 24% during FY17. In the formulations market, segments like Gastroenterology, Cardiovascular, Anti-Infective and Dermatological are the major segments having combined share of approximately 59% in FY18 (52% in FY17). Apart from the formulation sales in domestic market, Cadila also exports its medicines to various countries through its marketing set up in USA, Japan, Africa, UK and Russia. During FY18, the export sales contributed around 34% (34% in FY17) of total sales of the company. Further, Cadila has diversified its operations geographically through its Joint Venture Cadila Pharmaceuticals (Ethiopia) Plc., Ethopia, where Cadila holds 57.50% equity stake and the rest is being held by Almela Impex Plc. and Mesfin Teshome, companies based in Ethiopia. Strong product portfolio and adept marketing capability: Cadila has created some strong brands like Aciloc, Envas, Skinshine, Vasograin, Rabeloc, Haem-up amongst which Aciloc is in the top 300 brands of IMS-ORG list. However, the top 10 brands contributed around 45-50% of its formulation sales in past three years ended FY18 indicating concentrated product portfolio.

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 Credit Analysis & Research Limited

Press Release

Cadila’s marketing and distribution network comprises of a specialized work force of around 6200 employees including 200 employees outside , in Africa, Russia, Japan and USA along with coverage of over five lakh doctors including specialists and generalists. Cadila also market their products to various hospitals and medical institutions, which constitute an important channel for the distribution of their products. Internationally, Cadila markets its products in over 100 countries, including regulated markets such as the US and Europe through its own marketing and distribution network as well as by entering into alliances with global pharmaceutical companies.

Moderate revenue growth with improvement in profitability: Cadila’s total operating income grew y-o-y by 5% during FY18 which further improved in H1FY19 with growth in revenue from formulation division. Its PBILDT margin improved marginally by 43 bps to 11.83% in FY18, which further improved to 13.30% in H1FY19 on account of change in its product mix with launch of new products and rationalization of its fixed overheads.

Healthy growth prospects; albeit with increasing competition: The Indian Pharmaceutical Industry (IPI) is ranked third globally in terms of volume and thirteenth in terms of value. The lower market share in terms of value can be attributed to the predominance of IPI in generic medicines which command lower prices. In FY17, the industry faced slew of issues with increased scrutiny of regulatory authorities and increase in competition in generics market in USA. Also, the stricter enforcement of Drug Price Control Order has impacted revenue growth rate of the industry in domestic market. However, IPI saw a recovery during H1FY19 compared to the corresponding period a year ago. During H1FY18, exports and sales of the industry were under pressure on account of price competition in the generics market in USA. A stabilizing or decline in price erosion environment of USA and drug launches by pharma companies aided the growth in exports and, in turn, sales of the industry during H1FY19. Besides, exports to other parts of the world except USA also saw acceleration during H1FY19 as it grew by 12.7% compared to 4.1% growth registered by this segment during H1FY18.

Liquidity Analysis: The liquidity of the company was marked by moderate operating cycle of 87 days in FY18. The operating cycle has increased from 77 days in FY17 on account of reduction in creditors’ period. Cadila has reduced its creditors’ period in order to avail cash discounts from its suppliers. The average fund based working capital limit utilization of Cadila remained high at 87% for the past 12 months ended January 2019. Further, Cadila had unencumbered cash and bank balance of Rs.199 crore as on March 31, 2018 on a consolidated level (largely vesting in its foreign subsidiaries) providing some cushion to its liquidity; however, as per the management this liquid balance has been kept aside for potential investment opportunities and would not be repatriated to Cadila.

Key Rating Weaknesses High exposure towards subsidiaries/group companies with risk associated with unrelated diversification: Cadila’s exposure towards its subsidiaries and group companies increased from Rs.229.00 crore as on March 31, 2017 to Rs.239.49 crore as on March 31, 2018 which further increased by another Rs.41.00 crore during 9MFY19 despite sufficient liquid balance at foreign subsidiary level. At a consolidated level, Cadila recognized an impairment loss of Rs.9.59 crore in FY18 (Rs.43.88 crore in FY17) on the investment and loan provided to a subsidiary in FY15 mainly due to non- commercialization of technology. Cadila has promoted subsidiary company in India, IRM Energy Private Limited (IEPL) with total investment requirement of Rs.143.00 crore for the next eight years (Rs.13.24 crore invested as on March 31, 2018). IEPL is engaged in City Gas Distribution business and it has been awarded the tender for supply of city gas in following cities: Banaskantha (), Fatehgarh Sahib (Punjab) and Diu and Somnath (Gujarat). Moreover, Cadila has issued the bank (performance) guarantee of Rs.100.13 crore in favour of Petroleum and Natural Gas Regulatory Board (PNGRB). Further, Cadila acquired minority stake in Nivagen Pharmaceuticals Inc, USA involved in generic pharma business in the North American market. The acquisition was made in August 2017 through its wholly owned subsidiary, Satellite Overseas Holdings Ltd (SOHL), UK at a total cost of 10 million dollars (~Rs.65 crore). The acquisition was 100% debt funded and Cadila has extended corporate guarantee for the debt. Thus, the performance and returns on these investments would continue to be critical from the credit perspective.

High leverage: Cadila’s overall gearing continued to remain high at 1.97x as on March 31, 2018 despite accretion of profits to net worth and scheduled repayment of term loan on account of continual term loan drawal to fund its capex and investment requirement in group companies/ subsidiaries.

On-going capex and investment requirements: The company expects overall capex and investment requirements in group companies of around Rs.374 crore over the next three years ended FY21. Cadila is expected to set up a warehouse and an API plant at Dahej over the next three years for in-house manufacturing of some APIs required for its key selling formulations in the light of increase in prices of APIs with shutdown of some Chinese API plants on pollution concerns. The capex is expected to be funded through term loans of Rs.270 crore and balance through internal accruals.

2 Credit Analysis & Research Limited

Press Release

Foreign exchange fluctuation risk: Cadila imports around 15-20% of its total raw material requirement, thus exposing it to risk related to foreign exchange fluctuations. However, the foreign exchange risk is naturally hedged since exports formed around 34% of its total sales during FY18.

Exposure to regulatory risk: Cadila is exposed to regulatory risk since the players in the pharmaceutical industry need to manufacture products that meet the set quality standards of the various regulators. Good manufacturing practice (GMP) has to be followed for the control and management of manufacturing and quality control testing of drugs. The government also controls the prices of pharmaceutical products through the Drug Price Control Order (DPCO) under price control mechanism. Further, the pharmaceutical industry is highly regulated in many other jurisdictions and requires various approvals, licenses, registrations and permissions for business activities. Each authority has its own requirements and they could delay or refuse to grant approval, even when a product has already been approved in another country. The approval process for a new product registration is complex, lengthy and expensive. The time taken to obtain approval varies by country but generally takes from six months to several years from the date of application. Any delay or failure in getting approval for new product launch could adversely affect the business prospect of the company. Given, India’s significant share in the US’s generic market, the USFDA has increased its scrutiny of manufacturing facilities and other regulatory compliances of the Indian Pharma companies supplying generic drugs to the US. Non-compliance may result in regulatory ban on products/facilities (as in the recent cases of import alerts issued by the USFDA to top Indian Pharma companies) and may impact a company’s future approvals from USFDA. Hence, ongoing regulatory compliance has become critical for Indian Pharma companies, including Cadila.

Analytical approach: Standalone while factoring investment requirement in group companies and subsidiaries. CARE has considered standalone financials of Cadila. Along with this, CARE has also factored in the corporate guarantee provided by Cadila to Satellite Overseas Holdings Ltd (SOHL) of around Rs.65 crore, bank (performance) guarantee of Rs.100.13 crore provided to IRM Energy Pvt Ltd (IEPL) and future investment requirements in SOHL, IEPL and CPL Biologicals Ltd for arriving at the ratings of Cadila.

Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology-Manufacturing Companies Rating Methodology - Pharmaceutical Sector Financial ratios – Non-Financial Sector

About the Company Cadila was founded by late Mr. Indravadan Modi and Mr. Ramanbhai Patel in 1951. Subsequently, in 1995, it was bifurcated into two different companies namely Limited, part of Patel group and Cadila Pharmaceuticals Limited, part of Modi group. Cadila manufactures both formulations and API drugs for more than 45 therapeutic areas. The company has two Active Pharmaceuticals Ingredient (API) manufacturing facilities located at Ankleshwar (Gujarat), one formulation facility at Dholka (Gujarat) which is USFDA approved and one formulation facility at Samba (Jammu). Cadila also has a state of art R&D centre at Dholka and has formulation facilities in Ethiopia through its 57.50% Joint Venture (JV). Cadila exports its products to various countries through its marketing set up in USA, Japan, UK, Africa and Russia.

Brief Financials (Rs. crore) FY17 (A) FY18 (A) Total operating income 1,663 1,751 PBILDT 190 207 PAT 53 78 Overall gearing (times)* 2.08 1.97 Interest coverage (times) 2.75 3.71 A: Audited, *Redeemable preference shares have been included in debt for calculation of overall gearing which is in line with CARE’s policy of “Financial ratios – Non-Financial Sector” mentioned above under “Applicable Criteria”

As per provisional results, Cadila registered total operating income of Rs.984 crore with PBILDT of Rs.131 crore in H1FY19, as against total operating income of Rs.907 crore and PBILDT of Rs.104 crore during H1FY18.

Status of non-cooperation with previous CRA: Not Applicable

3 Credit Analysis & Research Limited

Press Release

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

Analyst Contact: Name: Mr. Naresh M. Golani Tel: 079-4026 5618 Mobile: +91-98251 39613 Email: [email protected]

**For detailed Rationale Report and subscription information, please contact us at www.careratings.com

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

Disclaimer CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors.

Annexure-1: Details of Facilities

Name of the Date of Coupon Maturity Size of the Rating assigned Instrument Issuance Rate Date Issue along with Rating (Rs. crore) Outlook Non-fund-based - ST- - - - 60.00 CARE A1 BG/LC Term Loan-Long Term - - January 2026 519.80 CARE A; Stable Fund-based - LT/ ST- - - - 320.00 CARE A; Stable / CC/PC/Bill Discounting CARE A1 Non-fund-based - LT/ ST- - - - 100.13 CARE A; Stable / Bank Guarantees CARE A1

4 Credit Analysis & Research Limited

Press Release

Annexure-2: Rating History of last three years

Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & Facilities Outstanding Rating(s) Rating(s) Rating(s) Rating(s) (Rs. crore) assigned in assigned in assigned in assigned in 2018-2019 2017-2018 2016-2017 2015-2016 1. Non-fund-based - ST- ST 60.00 CARE A1 - 1)CARE A1 1)CARE A1 1)CARE A1 BG/LC (26-Mar-18) (26-Dec-16) (26-Feb-16) 2)CARE A1 (15-Mar-18) 2. Term Loan-Long Term LT 519.80 CARE A; - 1)CARE A; 1)CARE A; 1)CARE A Stable Stable Stable (26-Feb-16) (26-Mar-18) (26-Dec-16) 2)CARE A; Stable (15-Mar-18) 3. Fund-based - LT/ ST- LT/ST 320.00 CARE A; - 1)CARE A; 1)CARE A; 1)CARE A / CC/PC/Bill Discounting Stable / Stable / CARE Stable / CARE CARE A1 CARE A1 A1 A1 (26-Feb-16) (26-Mar-18) (26-Dec-16) 2)CARE A; Stable / CARE A1 (15-Mar-18) 4. Non-fund-based - LT/ ST- LT/ST 100.13 CARE A; - 1)CARE A; 1)CARE A; - Bank Guarantees Stable / Stable / CARE Stable / CARE CARE A1 A1 A1 (26-Mar-18) (26-Dec-16) 2)CARE A; Stable / CARE A1 (15-Mar-18)

5 Credit Analysis & Research Limited

Press Release

CONTACT Head Office Ms. Meenal Sikchi Mr. Ankur Sachdeva Cell: + 91 98190 09839 Cell: + 91 98196 98985 E-mail: [email protected] E-mail: [email protected]

Ms. Rashmi Narvankar Mr. Saikat Roy Cell: + 91 99675 70636 Cell: + 91 98209 98779 E-mail: [email protected] E-mail: [email protected]

CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd.) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022 Tel: +91-22-6754 3456 | Fax: +91-22-6754 3457 | E-mail: [email protected]

AHMEDABAD HYDERABAD Mr. Deepak Prajapati Mr. Ramesh Bob 32, Titanium, Prahaladnagar Corporate Road, 401, Ashoka Scintilla, 3-6-502, Himayat Nagar, Satellite, - 380 015 Hyderabad - 500 029. Cell: +91-9099028864 Cell : + 91 90520 00521 Tel: +91-79-4026 5656 Tel: +91-40-4010 2030 E-mail: [email protected] E-mail: [email protected]

BENGALURU JAIPUR Mr. V Pradeep Kumar Mr. Nikhil Soni Unit No. 1101-1102, 11th Floor, Prestige Meridian II, 304, Pashupati Akshat Heights, Plot No. D-91, No. 30, M.G. Road, Bangalore - 560 001. Madho Singh Road, Near Collectorate Circle, Cell: +91-98407 54521 Bani Park, Jaipur - 302 016. Tel: +91-80-4115 0445, 4165 4529 Cell: +91 – 95490 33222 E-mail: [email protected] Tel: +91-141-402 0213 / 14 E-mail: [email protected] CHANDIGARH Mr. Anand Jha KOLKATA SCF No. 54-55, Ms. Priti Agarwal First Floor, Phase 11, 3rd Floor, Prasad Chambers, (Shagun Mall Bldg.) Sector 65, Mohali - 160062 10A, Shakespeare Sarani, Kolkata - 700 071. Chandigarh Cell: +91-98319 67110 Cell: +91 85111-53511/99251-42264 Tel: +91-33- 4018 1600 Tel: +91-0172-490-4000 / 01 E-mail: [email protected] Email: [email protected] NEW DELHI CHENNAI Ms. Swati Agrawal Mr. V Pradeep Kumar 13th Floor, E-1 Block, Videocon Tower, Unit No. O-509/C, Spencer Plaza, 5th Floor, Jhandewalan Extension, New Delhi - 110 055. No. 769, Anna Salai, Chennai - 600 002. Cell: +91-98117 45677 Cell: +91 98407 54521 Tel: +91-11-4533 3200 Tel: +91-44-2849 7812 / 0811 E-mail: [email protected] Email: [email protected] PUNE COIMBATORE Mr.Pratim Banerjee Mr. V Pradeep Kumar 9th Floor, Pride Kumar Senate, T-3, 3rd Floor, Manchester Square Plot No. 970, Bhamburda, Senapati Bapat Road, Puliakulam Road, Coimbatore - 641 037. Shivaji Nagar, Pune - 411 015. Tel: +91-422-4332399 / 4502399 Cell: +91-98361 07331 Tel: +91-20- 4000 9000 Email: [email protected] E-mail: [email protected]

CIN - L67190MH1993PLC071691

6 Credit Analysis & Research Limited