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October 05, 2017

Medreich Limited
Summary of rated instruments
Instrument* Rated Amount Rating Action

Term Loans – ECBs USD 28 million [ICRA]A+ (Stable); Reaffirmed


Fund Based Facilities Rs. 250.00 Crore [ICRA]A1+; Reaffirmed
*Instrument details are provided in Annexure-1

Rating action
ICRA has reaffirmed the long term rating of [ICRA]A+ (pronounced ICRA A plus) 1 outstanding on the
USD 28 million term loan facilities of Medreich Limited (Medreich / the company). The outlook on the
long term rating is Stable. ICRA has also reaffirmed the [ICRA]A1+ (pronounced ICRA A one plus)
rating outstanding on the Rs.250.0 crore short-term fund based facilities of Medreich Limited. Though
part of the bank limits of the company are denominated in foreign currency, ICRA rating for the same are
on the national rating scale, as distinct from the international rating scale.

Rationale
The reaffirmation in ratings continue to take into account the strong promoter background, improved
financial flexibility and increasing integration synergies enjoyed by Medreich, further to it becoming a
wholly-owned subsidiary of Meiji Seika Pharma Co. Limited (Meiji) in FY2015. The ratings also
continue to favourably factor in the company’s long track record, strong presence in the contract
manufacturing space and its established relationships with pharmaceutical majors. Further, its strong
manufacturing capabilities with facilities approved from various regulatory authorities coupled with
ongoing capacity expansion targeted at the Japanese markets are expected to support business prospects
for the company going forward. ICRA notes that while the company’s financial profile continues to be
characterized by healthy margins, its capital structure and coverage indicators continue to be affected by
the significant investments in expanding its capacities for setting up Unit-7 & 8 in Bengaluru over the last
2-3 years.

The ratings also take into account the intense competition faced by the company and susceptibility of its
revenues and margins to foreign exchange fluctuations and regulatory and political developments in
countries its export customers are located. The ratings are further constrained by the muted revenue
growth of the company over the last three fiscals (FY2015 to FY2017) and the high working capital
intensity, which in turn leads to relatively high working capital fund utilisation (88.4% of the sanctioned
limits for the 12 month period ended August 2017.

Medreich is currently availing an inter-corporate deposit from Meiji to fund its ongoing capital
expenditure; the three-year moratorium period before repayment of the same commences (in FY2020) is
expected to support the cash flows of the company over the next 2-3 years. ICRA notes that the
company’s ability to utilize the additional capacities successfully and derive benefits on the R&D front
and access to new business/clients through its parent will remain key rating sensitivities going forward.

1
For complete rating scale and definitions, please refer ICRA’s website (www.icra.in) or other ICRA Rating Publications
Key rating drivers

Credit strengths
 Strong promoter background and established track record – Medreich is a wholly-owned
subsidiary of Meiji Seika Pharma Co. Limited (Meiji), a leading Japanese pharmaceutical company
with presence in branded pharmaceuticals, veterinary drugs and agricultural chemicals; Medreich also
has a long track record in the contract manufacturing space in India in addition to its strong
manufacturing capabilities approved by various regulatory authorities
 Long-term relationship with key customers – The company has an established customer base of
both domestic and export customers and healthy wallet share of business with global majors aiding
business stability; Medreich derived 39.3% of its total sales from top five customers in FY2017, as
against 35.4% in FY2016.
 Strong financial profile – The company’s financial profile continues to be characterized by healthy
operating margins of 17.6% interest coverage ratio of 19.7x (primarily on back of low-cost term loans
which have been backed up by a corporate guarantee from the parent) during FY2017.

Credit weaknesses
 Intense competition, given the relatively low complexity of work involved – The company faces
stiff competition from other unorganised larger established players both in the domestic as well as
export markets restricing its pricing flexibility and bargaining power with customers to a certain
extent
 Revenues and margins remain susceptible to foreign exchange fluctuations – The revenues and
margins of the company remain susceptible to foreign exchange fluctuations and any adverse
movement in the same could have an adverse impact on the firm’s revenues and margins. Further, the
company’s revenues are also susceptible to regulatory and political developments in countries its
export customers are located and at times lead to volatility in revenues from certain customers or
geographies.
 Debt indicators and cash flows affected by ongoing capex - Ongoing capital expenditure funded by
USD 23 million ECBs from the parent towards expanding contract manufacturing operations at Unit-
7 for Japanese market is expected to strain cash flows and debt indicators to a certain extent during
FY2018. The total debt/OPBDITA stood at 2.9x while the total debt as on March 31, 2017 was
Rs.582.9 crore comprising of Rs.164.9 crore of ECBs from banks, Rs.76.9 crore of ECBs from Meiji
and Rs.341.2 crore of working capital facilities. However, ongoing capacity expansion targeted at the
Japanese markets is expected to support business prospects for the company going forward.
 High working capital intensity resulting from high inventory levels which impacts liquidity –
While the company generally maintains 60 days of domestic raw material inventory and 60-90 days
of imported raw materials, the inventory days during FY2017 stood at 96 days primarily on account
of higher stock held at Unit-7 due to its nascent stage of operations. The working capital intensity of
the company during FY2017 stood at 31.9% as against 26.7% during FY2016.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated
below.

Links to applicable criteria:


Corporate Credit Rating Methodology
Rating Methodology for Pharmaceutical Companies
About the company:
Medreich was incorporated in 1976 and commenced operations in 1982 by providing outsourced
manufacturing services for Glaxo Smith Kline (erstwhile SmithKline Beecham) Limited in India. Over
the years, Medreich has established itself as a medium-sized pharmaceutical company predominantly
engaged in providing contract research and manufacturing services (CRAMS) to domestic and global
pharmaceutical players. Apart from this, the Company also manufactures and distributes its own branded
generic formulations in regulated and semi-regulated markets. Medreich’s clientele includes several large
pharma companies like Glaxo Smith Kline (GSK), Pfizer and Novartis in India, Sanofi Aventis, GSK and
Adcock Ingram Holdins Limited in the European and African markets and Mylan in Australian and New
Zealand markets.

During FY2006, Temasek, through V-Sciences Investments Pte Limited invested about ~Rs. 111 crore in
the form of convertible preference shares for a 28.17% stake in Medreich. Subsequently, Temasek exited
the investment by selling its stake in Medreich to Meiji during FY2015.

Profile of Meiji Seika Pharma Co. Limited


Established in 1916, Meiji is engaged in manufacturing and sale of ethical pharmaceuticals, agricultural
chemicals and veterinary drugs. The pharmaceutical business was launched in 1946 with the
commencement of penicillin production and thereafter it forayed into anti-bacterial drugs and agriculture
chemicals and over a period of last 60 years, has established itself as a sizeable player in the
pharmaceutical industry. Meiji also has a strong track record in livestock and fishery veterinary drugs
business with diverse product lines and is working for the health of small animals, supplying drugs and
nutritional supplements. While Meiji had an annual turnover of USD 1.45 billion during FY2017 and is
engaged in the ethical pharma business through sale of neutraceuticals, agricultural chemicals and
veterinary drugs, the holding company of Meiji – Meiji Company Limited had a turnover of about USD
10.0 billion during FY2017.

Key Financial Indicators (Audited)


FY2016 FY2017
Operating Income (Rs. crore) 1,115.8 1,145.3
PAT (Rs. crore) 88.6 76.3
OPBDIT/ OI (%) 17.7% 17.6%
RoCE (%) 17.2% 12.5%

Total Debt/ TNW (times) 0.6 0.8


Total Debt/ OPBDIT (times) 2.1 2.9
Interest coverage (times) 16.8 19.7
NWC/ OI (%) 26.7% 31.9%
OI: Operating Income; PAT: Profit after Tax; OPBDIT: Operating Profit before Depreciation, Interest,
Taxes and Amortisation; ROCE: PBIT/Avg (Total Debt + Tangible Net-Worth + Deferred Tax Liability -
Capital Work - in Progress);
NWC: Net Working Capital

Status of non-cooperation with previous CRA: Not applicable

Any other information: Not applicable


Rating history for last three years:
Table:
S. No. Instrument Current Rating (FY2018) Chronology of Rating History for the past
3 years

Date & Date & Date &


Amount Date & Rating in Rating in Rating in
Rated Rating FY2017 FY2016 FY2015
Type October September July June
2017 2016 2015 2014
Long USD 28 [ICRA]A+ [ICRA]A+ [ICRA]A+ [ICRA]A-
1 Term Loans Term Million (Stable) (Stable) (Stable) (Stable)
Fund-based Short Rs.250.0
2 Limits Term Crore [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1

Complexity level of the rated instrument:


ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly
Complex". The classification of instruments according to their complexity levels is available on the
website www.icra.in
Annexure-1
Instrument Details
ISIN No Instrument Date of Coupon Maturity Amount Rated Current
Issuance / Rate Date (Rs. crore) Rating and
Sanction Outlook
[ICRA]A+
- Term Loans FY2017 - FY2025 USD 28 Million (Stable)
Fund-based
- Limits FY2017 - - Rs.250.0 Crore [ICRA]A1+
Source: the company
Contact Details
Analyst Contacts
Subrata Ray Pavethra Ponniah
+91 22 6114 3408 +91 44 4596 4314
subrata@icraindia.com pavethrap@icraindia.com

Mythri Macherla
+91 80 4334 6407
mythri.macherla@icraindia.com

Relationship Contact
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

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