Fitch Ratings has affirmed
The Outlook is Stable.
The affirmation reflects Glenmark's geographic diversification, which mitigates the business risks arising from its small size relative to peers, and adequate product pipeline. This, combined with robust long-term growth prospects in
The Stable Outlook reflects our expectation that Glenmark will maintain comfortable leverage headroom, despite the working-capital driven increase in debt in the financial year ended
We proportionally consolidate the active pharmaceutical ingredient (API) business, held under an 82.8%-owned subsidiary -
Key Rating Drivers
Comfortable Leverage Headroom: We expect consolidated net debt/EBITDA (after proportional consolidation of GLS) to remain stable, after a rise to 1.5x in FY23, from 1.2x in FY22. The headroom should remain solid against our negative rating threshold of 3.0x. Healthy growth in other markets and lower R&D spending should support profitability, despite sustained pricing pressure in the US, as well as remediation and legal costs.
Positive underlying free cash generation will cover a substantial portion of drug litigation settlement payment over FY24 and FY25 and limit any increase in debt, barring large strategic investments.
Small, Yet Diversified: Glenmark has low revenue and operating EBITDA compared with major global generic drug makers, but this is offset by the company's geographical diversification across pure and branded generic markets, including the US, which accounted for 24% of revenue in FY23,
Regulatory and Litigation Risk: Below-peer production-facility diversification exposes Glenmark to above-average risk from adverse regulatory actions that could hurt US sales and product approvals. This follows recent adverse actions by the
Solid Long-Term Domestic Prospects: The Indian government's focus on boosting mass healthcare access supports pharmaceutical demand. Glenmark's formulation business ranks 14th in
Risks in Novel Drugs: Glenmark faces high inherent risks around novel drug development due to its small scale and limited record. This is despite the approval of Ryaltris, Glenmark's maiden drug application in the US in early 2022. R&D spending weighs on profitability and free cash generation, although Glenmark expects further cuts after reducing R&D spending to 9.5% of sales in FY23, from 14.7% in FY19. We expect Glenmark to take a collaborative approach to R&D spending, in line with its strategy.
The company has signed multiple partnerships for its R&D assets and plans to sell a stake in
Proportional Consolidation of GLS: Glenmark's large stake in GLS underpins its strategic control and API sourcing flexibility. GLS is debt free, but its separate public listing limits Glenmark's access to GLS's cash flow for servicing Glenmark's debt, underscoring our approach of proportional consolidation. GLS accounted for 30% of Glenmark's consolidated EBITDA in FY23, including captive sales, but Glenmark's large stake limits the impact from Fitch's proportional consolidation. We expect GLS to remain debt free, with healthy free cash flow before dividends, despite growth investments.
Derivation Summary
Glenmark has smaller scale and diversification than large generic pharmaceutical companies, such as
Glenmark is rated two notches below
Glenmark is rated at the same level as
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to increase by mid-single digits annually over FY24-FY25.
EBITDA margin, after proportional consolidation of GLS, of 16%-17% over FY24-FY25 (FY23: 16.2%).
Capex to average between 5% and 6% of sales over FY24-FY25.
Stable annual dividend payouts at below 10% of net income.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
an increase in scale to at least
sustained positive free cash flow generation; and
financial leverage, measured by consolidated net debt/EBITDA after proportionally including GLS, sustained at below 1.5x (FY23: 1.5x).
Factors that could, individually or collectively, lead to negative rating action/downgrade:
a weaker competitive position or adverse regulatory action by the
deterioration in financial leverage to above 3.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: Glenmark had readily available cash, after proportionally consolidating GLS, of INR13.6 billion at
Issuer Profile
Glenmark is an
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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