Emami Group's health care entities face credit rating downgrade

The health care wing of Emami Group, comprising AMRI Hospitals and Frank Ross pharmacy chain, faced a credit rating downgrade in the recent past, even as the promoters decided to reduce their debt level by monetising the group’s assets and/or roping in a strategic partner.

The Agarwal and Goenka families — the promoters of Emami as well as other group companies — have decided to free up their pledged shares and reduce outstanding promoter debt of around Rs 2,200 crore by cashing in on some of the assets the group has created.

“The way forward is not finalised and we are open to all considerations to bring down our debt levels. Some of the assets we have created over the years have ripened and can fetch good valuation,” Aditya Agawaral, director at Emami, said.

Since the assets which can help reduce debt are yet to be identified, health care assets are also under consideration.

India Ratings and Research (Ind-Ra) has downgraded both AMRI’s as well as Frank Ross’ long-term issuer rating to ‘IND BBB+’, from ‘IND A-’, reasoning that the health care division is no longer a core business for the group.

According to Fitch, the share cover on debt raised against the pledge of shares of AMRI’s and Frank Ross’ guarantor declined to 2.3x in May 2019, from 3.1x in April 2018.

While reasoning behind the downgrade and the subsequent outlook, the rating agency said, the Emami Group expects to generate around Rs 1,500 crore by monetising some of its non-core businesses, including some of the units of AMRI, real estate investments, and proceeds from Emami Cement’s initial public offering over the next six months. 

“A further Rs 10,000 crore of funds will flow in the subsequent six months through monetisation of the remaining non-core assets. Successful conclusion of the asset monetisation plan can lead to a significant improvement in the group’s leverage. Conversely, a delay in asset monetisation can lead to stress on the group’s liquidity position,” the report pointed out.

In case Emami decides to offload its stakes in AMRI, a similar offload can simultaneously occur in Frank Ross as well, said sources.

According to the rating agency, Frank Ross’ earnings before interest, tax, depreciation and amortisation margin remained stable at 2.9 per cent, as the company shut its non-performing online business in March 2017. However, its operating profitability in the last financial year was below expectations of the rating agency, with benefits of better fixed cost absorption not being fully realised due to teething problems related to software upgradation, which led to a loss in sales and increased operating costs.

Ind-Ra noted that Frank Ross also redeemed non-convertible debentures (NCDs) worth Rs 125 crore in October 2018, while another round of NCDs worth Rs 50 crore were redeemed in May 2019. The redemptions were made using the proceeds from investments made in group companies.
 

The Emami Group holds 74.89 per cent in Frank Ross, while in AMRI, the group’s holding stands at 98.02 per cent.