S&P upgrades Glenmark to ‘BB’ on conservative debt hopes

S&P upgrades Glenmark to ‘BB’ on conservative debt hopes

Standard & Poor’s (S&P) has upgraded the long-term issuer rating on Glenmark Pharmaceuticals from “BB-” to “BB” on expectations of conservative debt levels given limited upcoming capital investments and healthy free operating cash flow.

Its debt is expected to decline by about 25 percent in fiscal 2012 (year ended March 31, 2022), given management’s commitment to maintain low leverage following the recent equity raise in its subsidiary. This is expected to bring the company’s fund to debt to operations (FFO) ratio to 35-40 per cent in FY22.

The rating agency said in a statement that the outlook is stable, reflecting the outlook that Glenmark will continue to maintain its fiscal policy in a manner that its FFO-to-debt ratio is comfortably above 30 per cent.

S&P said Glenmark will prioritize debt reduction over the next 12-18 months. It expects the company to repay debt of up to Rs 1,600 crore during FY12, which is in line with the management’s commitment.

Glenmark’s subsidiary, Glenmark Lifesciences Limited, concluded its public equity offering in July 2021 and raised around Rs 1,500 crore. Thereafter, Glenmark repaid about Rs 11 billion of its outstanding debt.

“We are confident that Glenmark will direct its surplus operating cash flow toward debt reduction over the next few quarters to meet its stated target.” Thereafter, the company’s adjusted gross debt is expected to remain stable at Rs 35-40 billion in FY 2022 and 2023, as against Rs 5,100 crore at the end of FY15.

Glenmark’s healthy revenue growth and cost optimization measures, including lower investment in research and development (R&D) (measured as a percentage of revenue), will boost its operating cash flow. The company is estimated to generate Rs 1,200-1,400 crore in annual operating cash flow in FY 2012 and FY 2013.

In addition, Glenmark has limited upcoming capital investment requirements during this period. It added that capex of Rs 600-700 crore annually should be restricted to maintenance and modest capacity addition – adequately covered by its operating cash flows in our estimation.

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

India, the company’s largest market, contributes over 30 per cent to the total revenue and we expect revenue from the country to grow by 15-20 per cent in FY22.

The company’s base portfolio of products in segments such as diabetes, consumer care, dermatology and respiratory is expected to increase sales. However, stabilizing the Covid-19 infection rate may reduce sales of FabiFlu (an oral antiviral used to treat Covid-19 patients) in the coming quarters, with about 10% of FY12 revenue from India. Percentage is the drug’s accounting.

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