Press Release

Cadila Pharmaceuticals Limited November 28, 2019 Rating Amount 1 Facilities Ratings Rating Action (Rs. crore) 572.29 CARE A; Stable Long-term Bank Facilities Reaffirmed (Enhanced from Rs.519.80 crore) (Single A; Outlook: Stable) 90.00 CARE A1 Short-term Bank Facilities Reaffirmed (Enhanced from Rs.60.00 crore) (A One) CARE A; Stable/ CARE A1 Long-term/Short-term Bank 460.13 (Single A; Outlook: Stable/ Reaffirmed Facilities (Enhanced from Rs.420.13 crore) A One) 1,122.42 (Rupees One Thousand One Total Facilities Hundred Twenty Two crore and Forty Two lakh only) Details of instruments in Annexure-1

Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Cadila Pharmaceuticals Limited (CPL) 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 increasing presence in export markets along with well-equipped Research & Development (R&D) facilities and its manufacturing facilities conforming to stipulations of various drug regulatory authorities. The ratings are also underpinned by the growth in its scale of operations along with improvement in its operating profitability during FY19 (refers to the period from April 1 to March 31) and H1FY20 and its adequate debt coverage indicators. The ratings, however, continue to be constrained by its moderate revenue concentration towards few brands and therapeutic segments in the domestic market, presence in the price-controlled domestic formulation business along with regulatory risk associated with pharmaceutical industry; and foreign exchange fluctuation risk. The ratings further continue to be constrained on account of CPL’s high exposure towards relatively weaker subsidiary/group companies by way of investments and extension of performance/corporate guarantees on behalf of some of them. The ratings are also constrained by CPL’s high leverage on account of continual drawal of term loans to fund its on-going capex, research and marketing expenses along with high dividend/royalty/corporate social responsibility (CSR) payout which has restricted the build-up of its net worth.

Rating Sensitivities Positive Factors . Increase in its total operating income (TOI) at a compounded annual growth rate (CAGR) of above 10% through greater revenue diversity along with earning PBILDT margin of more than 16% on a sustained basis . Improvement in overall gearing ratio to below 1 times along with improvement in its debt coverage indicators

Negative Factors . PBILDT margin remaining below 12% on a sustained basis . Extension of higher than envisaged financial support to subsidiaries or related parties in any form . Major debt-funded capex/acquisition leading to deterioration in its overall gearing ratio to more than 2 times on sustained basis

Detailed description of the key rating drivers Key Rating Strengths Long track record of operations along with experienced promoters and professional management: CPL has an operational track record of more than six decades in the domestic pharmaceutical industry with an established brand ‘Cadila’. Dr. Rajiv Modi, Chairman and Managing Director of CPL, is a second generation promoter. He is well-qualified and holds a degree in B. Tech (Chemical) from IIT Bombay apart from doing his M.Sc. in Biochemical Engineering from University College, London and Ph.D. in Biological Science from the University of Michigan, Ann Arbor, USA. The promoter group has rich experience in the pharmaceutical industry. Further, the promoters of CPL are supported by well -qualified and experienced management personnel.

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

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Established position in the domestic pharmaceutical industry with wide marketing and distribution network: CPL has an established position in the Indian pharmaceutical industry with a market share of 0.74% and 28th rank in the domestic formulation market as per AWACS - MAT September 2019 report (according to company’s management). CPL has a large portfolio of 713 products spread across 317 brands. Out of these, 35 products were launched during FY19 and Q1FY20. Further, two of its brands (Aciloc & Aciloc RD) are among the top 300 domestic formulation brands in India. CPL’s products cover several therapeutic segments including gastroenterology, dermatological, anti -infective, cardiovascular system (CVS), and respiratory system; albeit it has relatively less presence in chronic segments. CPL has one manufacturing facility in Jammu catering to domestic formulati on market, one US Food and Drug Administration (USFDA) approved manufacturing facility at Dholka (near Ahmedabad) catering to domestic as well as export markets and two active pharmaceutical ingredients (API) manufacturing units at Ankleshwar (in Gujarat) catering to domestic and export markets. Further, CPL has a formulation facility in Ethiopia through its subsidiary which caters to the African market. CPL’s marketing and distribution network comprises a specialized marketing workforce of over 2,400 medic al representatives (MR) and total sales team of around 3,000 personnel spread across India; albeit there is good scope for improvement in its MR productivity. CPL has over 200 employees located outside India in various regions including Africa, CIS, Japan, Russia and the USA. CPL’s large marketing network covers over 2.5 lakh doctors including specialists and over 4,000 stockiest. Globally, CPL markets its products in over 100 countries, including regulated markets such as US and Europe through its own marketing and distribution network as well as through alliances with global pharmaceutical companies.

Diversified operations with increasing presence in export market: CPL is engaged in manufacturing of formulations and APIs for domestic as well export markets. Share of API in CPL’s total sales increased from 21% in FY18 to 23% in FY19 as the sales of API grew at a faster pace than sales of formulations, especially in the export markets. Further, during H1FY20 sales of API grew at 20% over H1FY19 as against 10% growth in sales of formulations during the same period. CPL exports its products to various regulated markets including Europe, USA and Australia as well as to unregulated markets in Africa and Latin America. The share of exports in total sales also increased marginally from 37% in FY18 to 39% in H1FY20. CPL plans to expand its reach in the US market which provides a good opportunity for growth. As of September 30, 2019, CPL has filed 30 Abbreviated New Drug Applications (ANDAs) in the US (out of these, 19 ANDAs have been approved). CPL, through its wholly-owned subsidiary Satellite Overseas (Holdings) Limited (SOHL), acquired 16.24% stake in Nivagen Pharmaceuticals LLC, USA which is involved in marketing of generic formulations in the North American mar ket and is also involved in research related to developing generic formulations.

Established R&D capabilities: CPL has a fully integrated, centralized and multi-disciplinary R&D centre spread over around 1,05,000 square feet, which is recognized by the Department of Science and Technology, Government of India, and is manned by more than 300 scientists. CPL’s R&D efforts are directed at New Drug Delivery System (NDDS) and generic product development. The R&D centre of the company is well supported by capti ve clinical research facility with an installed capacity of around 100 beds. The facility is involved in conducting various types of activities including bio- analytical (BA) & bio-equivalence (BE) studies, Phase-I clinical trials, late phase clinical studi es (Phase II & III) and Pharmacovigilance. CPL spends around 3-4% of its total operating TOI on research and development. Further, CPL has entered into collaboration with several European pharmaceutical entities to jointly develop and market innovative as well as generic products. CPL has received Drug Controller General of India (DCGI)’s approval for its New drug Delivery System (NDDS) of rabies vaccine. NDDS of rabies vaccine developed by CPL completes the treatment of rabies in three doses compared to five doses required by vaccines presently available in the market. CPL has also developed Calcipotriol (a formulation to treat psoriasis) in a spray form in collaboration with one of its foreign R&D partner. Calcipotriol has already completed phase III clinical trial. CPL expects to market these products in India, Africa and other countries in Asia Pacific Region.

Growing scale of operations along with improvement in operating profitability (PBILDT) margins during FY19 and H1FY20 resulting in adequate debt coverage indicators: CPL’s TOI grew by around 6% during FY19 over that in FY18. CPL’s agro division which contributed 2% of its TOI in FY18 was demerged into a separate entity, IRM Enterprise Ltd., during FY19. Consequently, on a like-to-like basis, the TOI of CPL grew by around 9% during FY19 over that in FY18. Further, during H1FY20, CPL’s TOI grew by 8% on a y-o-y basis. Growth in TOI was led by healthy sales growth in all major business segments. Domestic formulation sales grew by 12% during FY19 and 6% during H1FY20. Further, according to company’s management the growth in CPL’s domestic formulation business was higher than the industry average in the last 12 months ended September 2019. The export of formulations de-grew by 4% during FY19 over FY18 primarily due to the reason that CPL had received one-time sales opportunity from the Venezuelan market during FY18 which led to a higher base during FY18. However, the export of formulations grew by 23% during H1FY20 over H1FY19 due to CPL’s increasing presence in Russia and South Africa. Sales of CPL’s API segment grew by 21% and 20% during FY19 and H1FY20 over FY18 and H1FY19 respectively, primarily driven by growth in export sales. CPL’s PBILDT margin also improved by 126 bps during FY19 over FY18 to 13.09%. A part of this improvement was due to change in the accounting policy (CPL earlier used to book its entire exchange loss on foreign currency borrowings as other 2 CARE Ratings Limited

Press Release expenses, whereas from FY19 onwards, a part of it is booked as interest/finance cost and the balance is included under other expenses). Consequently, on a like-to-like basis, its PBILDT margin improved by 89 bps despite an increase in royalty expenses and higher CSR spend. CPL’s PBILDT margin further improved by 329 bps during H1FY20 over H1FY19 due to better control over overheads and benefits of economies of scale. Despite improvement, its PBILDT margin remained at a moderate level compared to industry. Although, growth in TOI and improvement in PBILDT margin led to 17% and 35% increase in PBILDT during FY19 and H1FY20 over FY18 and H1FY19 respectively, however, its PAT grew by only 3% during FY19 over FY18 due to higher interest costs. Sustained improvement in CPL’s PBILDT margin would be a key rating sensitivity. CPL’s debt coverage indicators continued to remain adequate marked by PBILDT interest coverage ratio and total debt/PBILDT of 3.46x and 3.55x respectively during FY19 (3.71x and 3.93x respectively during FY18); however, meaningful improvement in its debt coverage indicators is not exhibited due to its persistent high debt levels which has not come down because of heavy R&D expenditure and various investments/higher dividend pay-out.

Key Rating Weaknesses Significant exposure towards subsidiaries/associate entities with relatively weaker credit profile: CPL has a significant exposure towards its subsidiaries and associate entities in the form of investments/loans & advances and corporate guarantees extended towards financial and performance liabilities of some of its subsidiaries which have relatively weaker credit profile compared to CPL. As on March 31, 2019, CPL had an investment of Rs.278.54 crore in equity and preference shares of subsidiary and associate companies (Rs.231.22 crore as on March 31, 2018) which is around 67% of CPL’s tangible net-worth. CPL has also utilized its performance bank guarantee limit of Rs.100 crore to issue a guarantee in favor of Petroleum and Natural Gas Regulatory Board (PNGRB) for obtaining city gas distribution license for its subsidiary IRM Energy Private Limited (IRMEPL) (rated: CARE BBB+; Stable/CARE A2). Further, CPL has extended corporate guarantee of USD 10 million (~Rs.71 crore) in favour of lenders of its wholly owned subsidiary SOHL for the term debt availed by SOHL for acquisition of minority stake in Nivagen Pharmaceuticals LLC, USA. Further, CPL has also extended corporate guarantee of Rs.25 crore to the lenders of IRMEPL for the issuance of performance bank guarantee to PNGRB. CPL holds 51% equity share capital in IRMEPL which is engaged in the city gas distribution business and has the license to operate in three geographical areas (GAs) i.e. districts of Banskantha, Diu & Gir Somnath, and Fatehgarh Sahib. IRMEPL generated profits in its first full year of operations, i.e.FY19, which is expected to provide support to its own operations during the initial phase. Hence, liability towards capital contribution in IRMEPL by CPL is expected to be limited to around Rs.10 crore per annum during the next two to three years. SOHL is an overseas investment arm of CPL through which CPL has investments in several pharmaceutical/non - pharmaceutical entities across the world. SOHL had a tangible net-worth of around Rs.428 crore as on March 31, 2019 which includes unencumbered cash and cash equivalent of Rs.100 crore. While CPL is contractually liable for the annual debt servicing requirement of around Rs.16 crore (~$2 million and interest thereon) for the term debt availed by SOHL, according to CPL’s management it does not have any committed investments in SOHL. Further, CPL has committed investments up to Rs.5.00 crore annually to one of its subsidiary, CPL Biologicals Private Limited (CPL Bio) which is an 80:20 joint venture between CPL and Novavax Inc (USA), which is a research oriented entity engaged in development of vaccines. CPL’s exposure to its subsidiaries/associates as above and its obligation to provide need-base support to them constrain the credit quality of CPL. Restricting its exposure to such entities within envisaged level and generating commensurate returns from such investments would be critical for CPL’s credit quality going forward.

High Leverage: CPL’s capital structure remained highly leveraged marked by an overall gearing ratio of 2.09xas on March 31, 2019 (as against 1.97xas on March 31, 2018). Total debt of CPL increased to Rs.866 crore as on March 31, 2019 (as against total debt of Rs.815 crore as on March 31, 2018) due to availment of term debt for regular capex as well as for meeting its research and marketing expenses. CPL is expected to avail further term debt of Rs.150 crore during FY20 for regular maintenance capex, de-bottlenecking of its manufacturing facility and research & marketing expenses. Hence, despite scheduled term debt repayment obligation of Rs.95 crore and Rs.110 crore during FY20 and FY21 respectively, CPL’s total debt is expected to remain at an elevated level in the medium term. Further, the tangible net worth of the company remained stable at Rs.413.93 crore as on March 31, 2019 as agai nst Rs.413.73 crore as on March 31, 2018, despite healthy PAT of Rs.80.55 crore reported during FY19 because CPL paid large dividend of Rs.62.54 crore to its shareholders during FY19. The demerger of its agro division during FY19 also resulted in around Rs .16 crore reduction in its tangible net-worth which led to moderation in its capital structure. However, as articulated by the management, the dividend pay-out of Rs.62.54 crore was a one-off event and CPL expects the dividend out-flow of around Rs.30 crore each year from FY20 onwards. High royalty and CSR expenditure has also restricted build-up of net worth and the related cash outflow has restricted reduction in debt levels of CPL.

Moderate revenue concentration towards few brands in the domestic formulation market: Sales of the top 10 brands contributed around 55% of CPL’s total revenue during the last three years ended March 31, 2019. Among the top 10 brands, two brands, viz., Aciloc and Aciloc RD contributed around 25% of the total domestic formula tion sales which 3 CARE Ratings Limited

Press Release underline moderate revenue concentration. Recently, the USFDA has issued a safety warning about the existence of carcinogenic impurities in the API Ranitidine which is used in the production of Aciloc. Subsequently, USFDA has found the impurities to be within permissible limits. Taking note of the issue, DCGI, the Indian drug regulator, has also started an investigation into the issue. However, as explained by the company management, CPL has tested its products and supplies for the possible carcinogenic impurities and found it to be well below permissible limits. Further, sales under its brand Aciloc have not been impacted by this adverse publicity in the months following this development. However, significant dependence on few products make CPL’s operations susceptible to any unforeseen regulatory actions.

Exposure to inherent regulatory risk: CPL is exposed to inherent regulatory risk since the players in the pharmaceutical industry need to manufacture products that meet the set qual ity standards of 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). Around 200 products of CPL are covered under DPCO which contribute around 35% of its domestic formulation sales, restricting its pricing flexibility and operating profitability to that extent. Further, the pharmaceutical ind ustry 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 these authorities could delay or refuse to grant approval, ev en when the 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 a new product launch could adversely affect the business prospects 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 a regulatory ban on products/facilities (as in the recent cases of import alerts issued by the USFD A to top Indian Pharma companies) and may impact a company’s future approvals from USFDA. However, CPL has Establishment Inspection Report (EIR) in place for its Dholka manufacturing facility. Further, its Ankleshwar API manufacturing facility was inspected by USFDA in August 2019 and was cleared without any observations. Foreign exchange fluctuation risk: CPL imports around 20% of its total raw material requirement, thus exposing it to risk related to adverse movement in foreign exchange rates. However, the foreign exchange risk is naturally hedged since exports form around 38% of its total sales during FY19. Further, CPL has given a corporate guarantee in respect to USD denominated term debt availed by SOHL. SOHL does not have any significant operating cash flows and CPL would need to support SOHL for its term debt servicing, further increasing its exposure to foreign exchange risk.

Liquidity: Adequate Although CPL’s current ratio was below unity at 0.94 times as on March 31, 2019 and it had high average utilization of fund-based working capital limits at around 95% during trailing 12 months ended September 2019, CPL’s liquidity was underpinned by its healthy cash flow from operations of Rs.226 crore during FY19 (Rs.149 crore during FY18). Improvement in operating cash flow was on account of better operating profitability during FY19 and stable operating cycle at around 82 days during FY19 (87 days during FY18). Further, CPL has also received enhancement in its sanctioned fund-based working capital limit from Rs.320 crore to Rs.360 crore which is expected to provide cushion to its liquidity. CPL has term debt repayment liability of Rs.95 crore during FY20. The company also envisages an equity dividend pay -out of Rs.32 crore and investment in subsidiaries of around Rs.35 crore during FY20. Moreover, the company plans to incur capex of around Rs.100 crore during FY20 for the major maintenance and debottlenecking of the capacity at its Dholka and Ankleshwar plants. For this capex, CPL plans to avail term debt of Rs.75 crore during FY20. Further, CPL has also availed another term debt of Rs.75 crore for funding research and marketing expenditure during FY20. CPL’s envisaged cash accruals (after adding back research and marketing expenses that are being funded through term debt) are expected to be sufficient to meet its term debt repayment and other obligations. Further, CPL had cash and cash equivalents of Rs.24.58 crore and Rs.136.70 crore on standalone and consolidated basis respectively (including cash balance of GBP 12.53 million in the form of fixed deposit with Bank of Baroda, UK for SOHL) respectively as on March 31, 2019. As articulated by the company’s management, the surplus cash available in its foreign subsidiary SOHL (for which support from CPL by way of investments and corporate guarantee for the term debt availed by SOHL has been factored in CPL’s credit profile) although earmarked for potential investment opportunities abroad and not likely to be repatriated to India can provide need-based liquidity cushion in case of any exigency in meeting the debt servicing obligations of CPL’s foreign subsidiaries.

Analytical approach: Standalone while factoring investment requirement in group companies and subsidiaries along with contingent liability towards corporate guarantee extended for debt availed by group entities For arriving at the ratings for CPL, CARE has considered its standalone business and financial profile. Along with this, CARE has also factored in the exposure towards corporate guarantee extended by CPL in favour of lenders of SOHL and IREMPL along with the exposure towards the performance bank guarantee extended to PNGRB. CPL’s committed investments towards SOHL, IRMEPL and CPL Bio have also been suitably factored in for arriving at the ratings of CPL. 4 CARE Ratings Limited

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Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition Criteria for Short Term Instruments CARE’s methodology for manufacturing companies CARE’s methodology for Pharmaceutical companies Financial ratios – Non-Financial Sector

About the Company Cadila Laboratories Limited was founded by late Mr. Indravadan Modi and Mr. Ramanbhai Patel in 1951. Subsequently, in 1995, it was divided into two companies namely Cadila Healthcare Limited, led by the Patel family and Cadila Pharmaceuticals Limited (CPL), led by the Modi family. CPL manufactures both formulations and API drugs for more than 45 therapeutic segments. The c ompany has two active pharmaceuticals ingredient (API) manufacturing facilities located at Ankleshwar (Gujarat), one formulation facility at Dholka (Gujarat) which is US FDA approved and one formulation facility at Samba (Jammu). CPL also has a state of ar t R&D center at Dholka and has formulation facilities in Ethiopia through its 57.50% Joint Venture (JV) with local Ethiopian partner. The company exports its products to various countries through its marketing set up in USA, Japan, UK, Africa and Russia. CPL has one wholly owned direct foreign subsidiary, Satellite Overseas Holdings Limited (SOHL), which acts as an overseas investment arm of CPL. Further, CPL has also invested into city gas distribution business through its another subsidiary IRM Energy Private Limited (IRMEPL: CPL holds 51% of equity share capital in IRMEPL).

Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total operating income 1,751 1,862 PBILDT 207 244 PAT 78 81 Overall gearing (times)* 1.97 2.09 Interest coverage (times) 3.71 3.46 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, CPL registered total operating income of Rs.1,063 crore with PBILDT of Rs.176 crore in H1FY20, as against total operating income of Rs.984 crore and PBILDT of Rs.131 crore during H1FY19. CPL registered PBT and PAT of Rs.107 crore and Rs.81 crore respectively during H1FY20, as against PBT and PAT of Rs.70 crore and Rs.55 crore respectively.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please Refer Annexure 2

Annexure-1: Details of Instruments/Facilities

Size of the Rating assigned Name of the Date of Coupon Maturity Issue along with Rating Instrument Issuance Rate Date (Rs. crore) Outlook Non-fund-based - ST- - - - 90.00 CARE A1 BG/LC Term Loan-Long Term - - March 2026 572.29 CARE A; Stable Fund-based - LT/ ST- CARE A; Stable / - - - 360.00 CC/PC/Bill Discounting CARE A1 Non-fund-based - LT/ ST- CARE A; Stable / - - - 100.13 Bank Guarantees CARE A1

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Annexure-2: Rating History of last three years

Current Ratings Rating history Name of the Date(s) & Date(s) & Date(s) & Date(s) & Sr. Amount Instrument/Bank Rating(s) Rating(s) Rating(s) Rating(s) No. Type Outstanding Rating Facilities assigned in assigned in assigned in assigned in (Rs. crore) 2019-2020 2018-2019 2017-2018 2016-2017 1)CARE A1 1)CARE A1 Non-fund-based - ST- (26-Mar-18) 1)CARE A1 1. ST 90.00 CARE A1 - (18-Mar-19) BG/LC 2)CARE A1 (26-Dec-16)

(15-Mar-18) 1)CARE A; Stable 1)CARE A; 1)CARE A; CARE A; (26-Mar-18) 2. Term Loan-Long Term LT 572.29 - Stable Stable Stable 2)CARE A; (18-Mar-19) (26-Dec-16) Stable (15-Mar-18) 1)CARE A; Stable / 1)CARE A; CARE A1 1)CARE A; CARE A; Fund-based - LT/ ST- Stable / (26-Mar-18) Stable / CARE 3. LT/ST 360.00 Stable / - CC/PC/Bill Discounting CARE A1 2)CARE A; A1 CARE A1 (18-Mar-19) Stable / (26-Dec-16) CARE A1 (15-Mar-18) 1)CARE A; Stable / 1)CARE A; CARE A1 1)CARE A; CARE A; Non-fund-based - LT/ ST- Stable / (26-Mar-18) Stable / CARE 4. LT/ST 100.13 Stable / - Bank Guarantees CARE A1 2)CARE A; A1 CARE A1 (18-Mar-19) Stable / (26-Dec-16) CARE A1 (15-Mar-18)

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.

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Contact us Media Contact Mr. Mradul Mishra Contact no. – +91-22-6837 4424 Email ID – [email protected]

Analyst Contact Mr. Krunal Modi Contact no. – +91-79-4026 5614 Mobile no. - +91-85111 90084 Email ID- [email protected]

Business Development Contact Mr. Deepak Prajapati Contact no. – +91-79-4026 5656 Email ID – [email protected]

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