S&P raises Glenmark to ‘BB’ due to expectations of conservative debt levels

Standard and Poor’s (S&P) has upgraded Glenmark Pharmaceuticals’ long-term issuer rating from “BB-” to “BB” pending prudent leverage levels given the limited capital investments to come and healthy free operating cash flow.

Its debt is expected to decrease by approximately 25% in fiscal year 22 (fiscal year ending March 31, 2022) given management’s commitment to maintain lower leverage following a recent capital increase in its subsidiary. This is expected to increase the company’s funds-from-operations (FFO) to debt ratio which is expected to reach 35-40% in fiscal 22.

The outlook is stable, reflecting the view that Glenmark will maintain its financial policy such that its FFO to debt ratio will remain comfortably above 30%, the rating agency said in a statement.

S&P said Glenmark will likely prioritize debt reduction over the next 12 to 18 months. He expected the company to repay up to Rs 1,600 crore in debt in FY22, in line with management’s commitment to deleverage.

Glenmark’s subsidiary, Glenmark Lifesciences Ltd, completed its public share offer in July 2021 and raised around Rs 1,500 crore. Glenmark subsequently repaid around Rs11 billion of its outstanding loans.

“We believe Glenmark will direct its excess operating cash flow over the next few quarters to further debt reduction in order to meet its stated target.” Thereafter, the company’s adjusted gross debt is expected to remain stable at Rs 35-40 billion in FY2022 and FY2023, compared to Rs 5,100 crore at the end of FY21.

Glenmark’s healthy revenue growth and cost optimization measures, including reducing investments (measured as a percentage of revenue) in research and development (R&D), will strengthen its operating cash flow. It is estimated that the company generates Rs 1,200 to 1,400 crore in operating cash each year in fiscal years 22 and 23.

In addition, Glenmark has limited future capital investment needs during this period. The capital expenditure of Rs 600-700 crore per year should be limited to maintenance and minor capacity improvements – adequately covered by its operating cash flow, according to our assessment, he added.

The rating agency said new product launches and favorable operating conditions are expected to support growth. Glenmark’s revenues in India, Europe and other international markets will continue to grow over the next 12-18 months.

India, the company’s largest market, accounts for over 30 percent of overall revenue and we expect the country’s revenue to grow 15-20 percent in fiscal year 22 .

Sales of the company’s core product portfolio in segments such as diabetes, consumer care, dermatology and respiratory tract are likely to increase. However, stabilizing Covid-19 infection rates could lead to lower sales of FabiFlu (an oral antiviral used to treat Covid-19 patients) in the coming quarters, with the drug accounting for around 10% of the company’s revenue. ‘exercise 22 in India.

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