Press Release Meril Life Sciences Private Limited

1 1 CARE Ratings Limited Press Release Meril Life Sciences Private Limited December 15, 2017 Ratings Facilities Amount (Rs. crore) Rating1 Rating Action Long-term Bank Facilities (Enhanced from crore) CARE A-; Stable (Single A Minus; Outlook: Stable) Reaffirmed Long-term/ Short-term Bank Facilities CARE A-; Stable/CARE A2+ (Single A Minus; Outlook: Stable/A Two Plus) Reaffirmed Total Facilities (Rupees Ninety Five Crore only) Details of instruments/facilities in Annexure-1 Detailed Rationale& Key Rating Drivers The ratings assigned to the bank facilities of Meril Life Sciences Private Limited ( Meril Life) continue to derive strength from the vast experience and resourcefulness of its promoters - the Bilakhia Group along with Meril Life s established brand in the domestic coronary stents market and growing export penetration with approval from regulatory authorities in Europe, US Food & Drug Administration (USFDA) for few of its products and establishment of marketing subsidiaries in new regions.

2 The ratings also continue to factor in steady growth in sales volume along with its moderate profitability and favorable growth prospects of the coronary stent industry. The ratings, however, continue to be constrained due to Meril Life s working capital intensive operations, its exposure to foreign exchange fluctuation risk and stiff competition from large and established global players and regulatory risks associated with medical devices industry. Meril Life s ability to further increase its scale of operations in both domestic as well as export markets and realize the envisaged benefits from the sales promotion activities and product development costs along with improvement in its profitability and debt coverage indicators while ensuring efficient management of its working capital would be the key rating sensitivities. Further, any adverse changes in regulations governing the medical device industry would also remain critical.

3 Detailed description of the key rating drivers Key Rating Strengths Resourceful promoter group having vast experience in setting up and running various businesses and support extended to Meril Life BHPL is the ultimate holding company of the Bilakhia Group which is the erstwhile promoter of Hubergroup India Private Limited (HIPL; rated CARE AAA; Stable/CARE A1+ ; erstwhile Micro Inks Limited ) and Bayer Vapi Pvt Ltd (BVPL; erstwhile Bilag Industries Private Limited ) and presently has diversified business interests in the fields of investment, education and medical devices through its various subsidiaries. Over the years, the promoters have successfully demonstrated their ability to create business models delivering world class quality products and achieving economies of scale. The book value of BHPL s investments in equity shares and debt/liquid mutual funds was crore (the market value being crore) as against total debt on the books of BHPL (consolidated) of crore as on September 30, 2017.

4 These investments provide strong financial flexibility and enables BHPL to support its subsidiaries, as and when required. Although, there has been steady growth in sales volume of the company, but BHPL has been supporting the operations of Meril Life to fund the product development cost and incremental working capital requirements. Established brands in coronary stents and balloon segment with increased penetration in export markets Meril Life routes its entire sales in the domestic market through its wholly owned subsidiary Meril Life Sciences India Private Limited * Meril India; rated CARE AA- (SO); Stable/ CARE A1+ (SO) +. Meril India also sells orthopedic products of 1 Complete definition of the ratings assigned are available at and other CARE publications 2 CARE Ratings Limited Press Release Maxx Orthopedics Inc., USA, (a group company) in the domestic market.

5 At consolidated level, Meril Life during FY17 derived around 73% of its sales from coronary stent segment (78% in FY16) and balance from sales of balloon catheters to carry out angioplasty while knee replacement kits were sold through Meril India. In the coronary stent segment, Meril Life manufactures drug eluting stent (DES), bioresorbable as well as bare-metal stent (BMS) which mainly include cobalt chromium stents. Meril Life s products are CE marked (mainly required for product to be sold in European Union), approved by ANVISA (drug regulatory authority of Brazil), Ministry of Food & Drug Safety of Korea (MFDS), Ministry of Health (Russia) and Drug Controller General of India (DCGI). The balloon dilatation catheter has got approval from USFDA, Health Canada, Ministry Health Labour and Welfare of Japan (MHLW), China Food and Drug Administration (CFDA), Therapeutic Goods Administration, Australia (TGA) under medical devices.

6 There has been increase in exports of the company from crore during FY16 to crore during FY17, a strong growth of Meril Life exports to around 90 countries in the world. The major export destinations are Germany, South East Asia, Middle East, Europe, Africa, Brazil and Turkey. Meril Life has also set up marketing subsidiaries across Germany, Turkey, USA, Russia, South Africa, Brazil, Bangladesh and Australia. Growth in scale along with stable profit margin albeit moderate debt coverage indicators On a consolidated basis, Meril Life s TOI increased by during FY17 on a y-o-y basis driven by increase in export sales. Although the sales volume of stents (DES and BMS combined) grew by on a y-o-y basis during FY17, there was a slight decline in realisation for both stents. The company s PBILDT margin remained moderate at during FY17 (FY16: ). The PBILDT margin has remained moderate primarily on account of high marketing and sales promotion activities done by the company to establish its brands in domestic and international markets.

7 On a consolidated basis, Meril Life s overall gearing remained moderate at times as on March 31, 2017 (March 31, 2016: times; considering crore of preference shares and unsecured loan from BHPL as quasi equity as the same are subordinated to bank facilities) on account of high working capital requirements, product registration cost as well as debt taken for construction of training center. The total debt taken by the company increased from crore as on March 31, 2016 to crore as on March 31, 2017. The increase in debt levels also led to some moderation in company s debt coverage indicators with interest coverage reducing from times during FY16 to times during FY17 and total debt to gross cash accrual ratio moderating from times during FY16 to times during FY17. Favorable growth prospects of coronary stent industry; albeit with high competition from global players Rising health consciousness, increasing cases of sedentary disease including coronary heart diseases and increased healthcare expenditure is expected to drive the market for coronary stent industry in the medium term.

8 Other prominent growth drivers include rapidly growing medical technology industry and rising affordability of coronary heart disease treatment. Furthermore, the penetration of stents in developing countries including India is much less compared to developed counties like USA, Japan and European Union. The company has also been working to develop new products and has developed bioresorbable stents as well as heart valves over the past few years. Meril Life faces stiff competition from large multinational companies (MNCs) like Abbott, Boston Scientific and Medtronic. These companies have established products and high Research and Development (R&D) spend compared to Meril Life. However, over the years, the market share of domestic manufacturers including Meril Life has increased to 40% in the Indian market. Key Rating Weaknesses Working capital intensive operations Meril Life s operations are working capital intensive as indicated by operating cycle of 246 days in FY17 (FY16: 218 days) primarily on account long collection and inventory period.

9 The company needs to maintain high inventory levels owing to its wide product portfolio which also includes products for exports markets. Furthermore, the collection period remained high on account of high credit period extended to the distributors and hospitals. The same has led to high utilisation of fund based working capital limits at around 90% for the past 12 months ended September 2017. Foreign exchange fluctuation and regulatory risk During FY17, Meril Life on consolidated basis imported raw material for stents and orthopedic products and incurred other expenses primarily sales promotion, conference and traveling expenses to the tune of crore (FY16: crore) while exports were crore (FY16: crore) resulting in net inflow of foreign currency. Although, imports partially hedge the exports of the company, it still continues to remain exposed to foreign exchange fluctuation risk.

10 During FY17, Meril Life, on a consolidated basis incurred forex loss of crore (FY16: profit of crore). Further, Meril Life s business remains exposed to regulatory changes in domestic and export markets. During February, 2017, Government of India through National Pharmaceutical Pricing Authority (NPPA) capped the ceiling prices of DES 3 CARE Ratings Limited Press Release and bioresorbable stents at ,600 per unit and BMS at ,260 per unit. The impact of price cap was low on Meril Life s DES and BMS stents as its realizations during FY16 and FY17 were lower than the ceiling price imposed by NPPA. In addition, the company also remains exposed to compensation to be paid to patients in case of faulty implants mitigated by the adequate cover through product liability insurance taken by the company. Analytical approach: Consolidated as Meril Life s subsidiaries including Meril India are the marketing arm for the products manufactured by it.