India Ratings Places Dishman Carbogen Amics on RWE; Withdraws CP Rating

31
DEC 2019

By Tej Karan Singh

India Ratings and Research (Ind-Ra) has placed Dishman Carbogen Amcis Limited’s (DCAL) Long-Term Issuer Rating of ‘IND A+’ on Rating Watch Evolving (RWE). The
Outlook on the earlier rating was Stable. The instrument-wise rating actions are as follows:

Instrument Type Date of Coupon Rate Maturity Date Size of Issue (million) Rating/Rating Watch Rating Action
Issuance

Fund-based limits INR3,349.0 (reduced from IND A+/RWE/IND Placed on RWE

INR3,979) A1+/RWE

Non-fund-based INR336.7 IND A1+/RWE Placed on RWE

limits

Commercial paper 30 to 90 days INR500.0 WD Withdrawn (the

(CP; carved out of company did not
fund based limits) proceed with the
instrument as
envisaged)

Term loan FY24 INR2,526.8 (reduced from IND A+/RWE Placed on RWE
INR3,637.3)

Proposed fund-based INR850.0 (increased from Provisional IND Placed on RWE

/non-fund-based INR700.0) A+/RWE/Provisional IND
limits* A1+/RWE

* The ratings are provisional and shall be confirmed upon the sanction and execution of loan /transaction documents for the above instruments to the satisfaction of Ind-Ra.

Analytical Approach: Ind-Ra continues to take a consolidated view of DCAL and its subsidiaries because of the legal and operational linkages between them.

The RWE reflects the search operations conducted by income tax authorities at the company’s head office and manufacturing sites on 19 December 2019. Ind-Ra would be monitoring
the event closely and would take appropriate rating action based on the outcome of the enquiry.

KEY RATING DRIVERS

Search Operation by Income Tax Authorities: The income tax authorities conducted a search operation at the company’s head office, manufacturing sites and residences of
the promoter in connection with the search under Section 142 of the Income Tax Act on 19 December 2019. The company has clarified to the agency that all cooperation has
been extended to the tax authorities and that the search has been completed. The management also clarified that it does not expect any material impact on the operations of the
company. Nevertheless, Ind-Ra will monitor the developments in this matter as well as any adverse impact of the same on the company’s operational and business profile.

Stable Credit Profile: DCAL’s net adjusted leverage (excluding investments in perpetual bonds, preference shares in other entities and equity mutual funds), as per Ind-Ra’s
calculation, improved to 1.8x in FY19 (FY18: 2.4x). This was driven by improvement in the EBITDA and reduction in gross debt to INR10.4 billion (INR10.9 billion). The net
leverage remained at 1.8x in 1HFY20 (on trailing 12-month basis). The agency expects DCAL’s net leverage to improve by end-FY20, as the company’s revenue and EBITDA have
generally been higher in the second half of the financial year. Ind-Ra estimates the net leverage to remain in the range of1.6x–1.75x in FY20. The gross interest coverage was
8.6x in 1HFY20 (FY19: 9.8x, 1HFY19: 8.3x, FY18: 9.1x) and is likely to remain at around 10.0x during FY20.

On a standalone basis (without including dividend income from subsidiaries), the net leverage was 2.9x in FY19 (FY18: 3.5x) (excluding investments in perpetual bonds,
preference shares in other entities and equity mutual funds) and the interest coverage ratio was 4.1x (4.7x).

Improved Revenue and Stable EBITDA Margins: In FY19, DCAL’s revenue grew by 21% yoy to INR20,586 million, largely driven by growth of 17.5% in the CRAMS
business, 12.0% in the marketable API molecules business, and gains on hedged forex positions. DCAL maintained high EBITDA margins of above 25% in during FY16-1HFY20
(1HFY20:26.8% FY19: 26.8%, FY18: 26.3%) on account of increased revenue from its high-margin CRAMS commercial manufacturing division.

At end-FY19, DCAL had more than 450 molecules in various phases of development under the CRAMS business segment. DCAL expects nine out of 18 API molecules in late phase
III to be commercialised in the next 36-48 months, which are likely to garner sustained growth in revenue and margin expansion over the medium term. Furthermore, under
marketable molecules, the company plans to forward integrate into soft-gel vitamin D capsules. The agency expects DCAL to maintain EBITDA margins above 26% over FY20-
FY21.
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 On a standalone basis, the revenue stood at INR5,495 million in FY19 (FY18: INR4,745 million) and the EBITDA margins stood at 35.3% (35.1%)

Diversified Business Profile: DCAL operates under two segments – 1) CRAMS business (contributed 76.6% to the overall revenue in FY19) and 2) marketable API molecules
business (23.4%). In terms of therapy, DCAL focuses on high value added areas such as oncology, which accounts for more than half of the total revenue. Other key focus areas
include cardiovascular, central nervous system and orphan drugs.

DCAL has been focusing on high-margin API molecules across the development spectrum in the CRAMS business since FY16. It has strong custom synthesis capabilities and
maintains high confidentiality, which helps in tapping innovators at the pre-clinical stage of product development. DCAL also has a clean regulatory track record, enabling it to
establish strong relationships with innovators. Moreover, it is the preferred API supplier for certain products approved by the US Food and Drug Administration, which has also
approved DCAL’s multiple manufacturing facilities at various locations, thereby reducing its reliance on a single plant. This has also freed up capacity constraints at Carbogen
Amcis, allowing the site to focus on early-phase trials.

DCAL also has strong commercial arrangements wherein either the company or the customer may choose to discontinue the contract. Although this may affect the company’s
revenue and profitability, DCAL has a demonstrated track record of customer retention, as clients would need to incur high commercial and regulatory costs to switch suppliers;
this restricts the risk of client loss. Moreover, DCAL benefits from take-or-pay contracts with some customers. Also, a typical contract for commercial APIs covers the entire patent
life of a product while price negotiations are at pre-defined intervals. The top global players account for around 25% of the company’s turnover; however, nearly 75% of the
clients are small and medium-sized biotechnology companies, mitigating its revenue concentration risk.

High Working Capital and Maintenance Capex Requirements: DCAL’s working capital intensive operations are reflected in its long net working capital cycle. At end-
1HFY20, net working capital cycle as a percentage of sales stood at 43% on an annualised basis (FY19: 39%, FY18: 44%). The long working capital cycle is mainly on account of
the high inventory requirements, in line with order book requirements, as commercial orders are placed by the customer in a lumpy manner. Furthermore, the company pays
advances to vendors in exchange for a discount, as it benefits from low borrowing costs in foreign currency. However, this is partially set off by advances received from customers
for development projects. Accordingly, Ind-Ra expects working capital requirements to remain high over the medium-to-long term.

DCAL incurred a capex of around INR3.1 billion in FY19 (FY18: INR2.2 billion). The company has maintained similar capex plans over the medium term for routing maintenance
capex, to meet the regulatory requirements at its sites as well as future expansion for new products and capacity additions in existing plants.

Liquidity Indicator-Adequate: DCAL’s average utilisation of its fund-based limits of INR3,349 million was moderate at 58% for the 12 months ended November 2019 (peak
utilisation of 85% in March 2019). The company’s unencumbered cash balance stood at INR763 million at end-FY19 (FY18: INR655 million). Additionally, it has investments in
perpetual bonds, preference shares in other entities and equity mutual funds of INR1,176 million (FY18: INR1,503 million). The company has scheduled repayments of INR1,597
million for FY20 and INR1,468 million in FY21.

DCAL has generated strong annual cash flows from operations (CFO) of around INR2.0 billion per year since FY16 (FY19: INR2,401 million, FY18: INR1,918 million). However, due
to high capex, its free cash flow was negative during FY18-FY19. Ind-Ra expects the free cash flow to turn positive in FY20 due to relatively lower working capital outgo.

Moderate Forex Risk: DCAL derives 98% of its revenue in foreign currency, whereas majority of its costs are incurred in the currency of the respective site. Moreover, the debt
is also denominated in foreign currency. The company takes a forward cover to hedge part of its export revenues and receivables to mitigate currency fluctuation risk.

Low Asset Efficiency: DCAL operated at a suboptimal gross fixed asset turnover (excluding forex adjustment) of 0.71x in FY19 (FY18: 0.62x), which is lower than that of its
peers. The low asset efficiency is mainly on account of 1) low capacity utilisation at the facility in China (FY19: 25% capacity utilisation) and Bavla (65%), and 2) the building
commissioned during FY19 for the development segment in Switzerland. As the facilities ramp up, the management expects asset utilisation to improve on a yoy
basis. Furthermore, due to an increase in the proportion of high-margin oncology APIs in the overall revenue, the return ratios are likely to improve FY21 onwards.

RATING SENSITIVITIES

The RWE indicates that the rating may be upgraded, affirmed or downgraded. Once it obtains greater clarity on the matter, Ind-Ra will evaluate the impact of the income tax
department’s search operation on the business and financial profile of DCAL and resolve the RWE within the next six months.

COMPANY PROFILE

Incorporated in 1983, DCAL is an integrated CRAMS player. The company operates 23 multipurpose facilities across India, Switzerland, France, the Netherlands, UK and China, and a
dedicated production facility for APIs and intermediates in Bavla and Naroda. Most of its facilities have been approved/ certified by health authorities.

FINANCIAL SUMMARY (Consolidated)

Particulars FY19 FY18

Revenue (INR million) 20,586 16,948

EBITDA (INR million) 5,519 4,454

EBITDA margin (%) 26.8 26.3

Gross interest coverage (x) 9.8 9.1

Net financial leverage* (x) 1.8 2.3

Gross Debt (INR million) 10,422 10,948

Cash Balance(INR million) 763 655

Source: DCAL, Ind-Ra

* Excluding investments in perpetual bonds, preference shares in other entities and equity mutual funds

RATING HISTORY

/
 Instrument Type Current Rating/Outlook Historical Rating/Outlook

Rating Type Rated Rating 10 December 2018 25 August

Limits 2017
(million)

Issuer rating Long-term - IND A+/RWE IND A+/Stable IND A+/Stable

Fund-based limits Long-/short-term INR3,349.0 IND A+/RWE/IND A1+/RWE IND A+/Stable/IND A1+ IND
A+/Stable/IND
A1+

Non-fund-based limits Short-term INR336.7 IND A1+/RWE IND A1+ IND A1+

CP (carved out of fund based limits) Short term INR500.0 WD IND A1+ IND A1+

Term loan Long-term INR2,526.8 IND A+/RWE IND A+/Stable IND A+/Stable

Proposed fund based /non fund based limits Long-term/ Short-term INR850.0 Provisional IND A+/RWE/Provisional IND A1+/RWE Provisional IND A+/Stable/Provisional IND A1+ -

COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for
the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any
investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Corporate Rating Methodology

Analyst Names

Primary Analyst
Tej Karan Singh

Management Trainee

Secondary Analyst
Vanyasree Paila

/
 Senior Analyst
+91 44 43401724

Committee Chairperson
Vivek Jain

Director
+91 11 43567249

Media Relation
Namita Sharma

Manager – Corporate Communication

+91 22 40356121