Jubilant Pharma: Fitch revises outlook to 'negative'; affirms 'BB' rating

Fitch Ratings has lowered its outlook on Jubilant Pharma Ltd's (JPL's) long-term Issuer Default Rating (IDR) from “stable” to “negative” on expectation of a deterioration in the company's profitability. This is likely to see financial leverage of Jubilant Pharma surge to above the negative rating sensitivity level in the financial year ending March 2023 (FY23).

The agency affirmed the IDR at 'BB' for the Singapore-based company.

Jubilant Pharma's profitability should stabilise in FY24, which would help leverage return to below the negative rating sensitivity level. Nevertheless, JPL's weak headroom underscores the downside risks from operational underperformance or investments that were more aggressive than Fitch expected, Fitch said in a statement.

JPL's limited dependence on generic formulations and favourable market position in speciality pharmaceutical-focused segments underpins its credit profile. This was despite its small size and the high degree of regulatory risk arising from limited production-facility diversification.

Lower profitability

Fitch estimates the pharma company’s EBITDA to drop significantly in FY23, due to lower volume and narrowing of the margin to 11 per cent (FY22 estimated: 14 per cent). A slow volume recovery at JPL's high-margin radio-pharma business will coincide with higher R&D spending and the tapering of the Covid-19 pandemic-related uplift in contract manufacturing of sterile products (CMO) and generic dosage segments, Fitch said.

JPL is shifting its active pharmaceutical ingredients (API) business to its parent, Jubilant Pharmova Limited (JPHL). The expected pricing pressure would weigh on profitability in the generic segment, despite the normalisation of one-off factors in 2HFY22. The estimates do not factor in yet-to-be approved products and hence remain more conservative than JPL's FY24 expectations, it added.

Weak leverage headroom

JPL's financial leverage, measured by consolidated net debt/EBITDA, is expected to rise to 3.9x in FY23, from 1.8x in FY21. This is above the 3.0x level where the rating agency would consider negative rating action. Pre-Research & Development EBITDA in FY24 is likely to remain above our FY22 estimate, but elevated R&D spending along with expansion capex will narrow leverage headroom.