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| Fitch Rates VHB Lifesciences Bank Loans 'BBB-(ind)'/'F3(ind)' |
| Announcement / Banking Jun 26, 2009, 18:59 IST |
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Fitch Ratings has today assigned India's VHB Lifesciences Ltd (VLSL) a National Long-term rating of 'BBB-(ind)' with Stable Outlook and the following ratings to VLSL bank loans:
- INR40m outstanding long term loan: 'BBB-(ind)';
- INR920m fund-based working capital limit: 'BBB-(ind)'; and
- INR35m non fund-based working limit: 'F3(ind)'.
The rating reflects VLSL's established presence in the domestic healthcare space with products that cater to the high-margin critical care segment, its strong brand name, as well as its successful transition into manufacturing in 2001 from being a mere importer and distributor of lifesaving drugs.
The rating also factors in the operations of VHB Medisciences Ltd (VMSL) - a group company set up by the sponsors of VLSL in 2005 to meet part of its manufacturing requirements currently undertaken by a third party and on a loan license basis as well as to undertake contract manufacturing activities. Fitch has taken a consolidated view of the group in lieu of their strong operating linkages including common brand name, common treasury and a relatively high availability of liquidity across the group. Legal linkages in the form of corporate guarantees between the entities also exist. For FY09, which takes into account VMSL's first full year of operations for Phase I of its operations, the estimated consolidated revenues stood at INR3,351and EBITDA was INR659m.
Constraining the rating, however, is the high working capital-intensive nature of VLSL's business and the consequent negative cash from operation (CFO). This has resulted in the near full utilisation of its fund- based working capital limits, thereby constraining the liquidity support available to the company. Fitch notes that a wide distribution network and the nature of customers (i.e. hospitals) and the government have resulted in high inventory and receivable days. Fitch also notes that the company has adopted measures to streamline its working capital requirements; nonetheless, the agency expects liquidity to remain stretched in the short term.
Other constraints emanate from VLSL's increased financial risk resulting from VMSL's ongoing debt-led capex fully guaranteed by VLSL and its limited operational track record. VMSL, which has seen a full year of operations for Phase I in FY09, is currently setting up Phase II to be completed in December 2009. For FY09, the company's estimated consolidated debt stood at INR1,981m while Debt/EBITDA was 3.0x. In addition, possible pressure on VLSL's profitability due to stiff competition for its products, resulting in lower margins could contribute to higher financial risk. Fitch notes that in FY08, VLSL did witness erosion in operating margins for most of its products resulting in a decline in operating profitability. Thus a decline in consolidated profitability to the extent that consolidated Debt/EBITDA exceeds 5.0x as well as additional significant debt-led capex could result in a negative trigger. However, Fitch notes that a better-than-expected performance of the two companies in the coming years could be a positive trigger for the rating.
Initially established as a partnership by Shri Ramesh Bhagat in 1946, VSVL was converted into a closely held public limited company in 2007. The company's product portfolio covers high-end therapeutic segments like infertility, immunoglobulin, neurology, nephrology and almost 30% of patients under critical care therapies in India are prescribed one or more of VLSL's products. During the FY03-08, the company on a standalone basis has seen revenue CAGR of 46% and an EBITDA CAGR of 58%.
Fitch Ratings currently maintains coverage of approximately 6,000 financial institutions, including over 3,200 banks and 2,200 insurance companies. Finance & leasing companies, broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of Fitch Ratings’ financial institution coverage universe.
Fitch India has Five rating offices located at Mumbai, Delhi, Chennai, Kolkata and Bangalore. Fitch is recognised by Reserve Bank of India, Securities Exchange Board of India (SEBI) and National Housing Bank.
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