Rationale

 The revision in outlook to Positive from Stable takes into account the material improvement in Allchem Lifescience Limited’s (Allchem/ the company) credit profile supported by healthy revenue growth and margins and ICRA’s expectations that the same would sustain going forward with a likely improvement in its scale of operations supported by commencement of operations for the expanded capacity. The ratings continue to factor in the extensive experience of Allchem Lifescience Private Limited’s (Allchem) promoter in the pharmaceutical industry, along with the company’s established track record in the intermediates space. The company has over 150 customers, which include reputed pharmaceutical companies like Lupin Limited, Laurus Labs, Sun Pharma, Dr Reddy’s Labs, Alembic Pharma, etc. Allchem has developed strong relationships with them, ensuring repeat orders. The company’s customer diversification remains healthy with the top-10 customers accounting for 65% of the revenues in FY2024. The company has developed and commercialised a product portfolio encompassing over 400 molecules, which include drug intermediates and specialty chemicals with the top-10 molecules contributing ~72% to the revenues in FY2024. In FY2024, the company completed its capacity expansion project and commenced commercial operations for the same, resulting in the manufacturing capacity increasing from 55 Metric Ton Per Month (MTPM)to 180 MTPM. There was a slight delay in completion of the capex and commencement of commercial operations with slight cost overruns (started in December 2023 against the earlier plan of Q1 FY2024) due to few plant modifications. However, this incremental cost was completely funded through internal accruals. Going forward, the company’s ability to ramp up operations for the enhanced capacity will be a key monitorable. The company’s revenue rose 20.9% year on year to Rs.133.5 crore in FY2024 mainly on the back of volume growth with repeat orders from the existing customers and some contribution from incremental revenue from the expanded capacity. Although realisation for the company’s top products declined in FY2024 (mainly for intermediates for the generic products) due to pricing pressure arising from higher competition, impact of the same on the revenue growth was offset by healthy volume growth. The company’s operating margin improved by 690 bps year on year to 36.7% in FY2024, supported by favourable product mix with increased revenue contribution from high-margin intermediates for innovator molecules and speciality chemicals and operating leverage. Going forward, the company is expected to maintain its strong revenue growth, supported by repeat orders from the existing customers and availability of incremental capacity, while maintaining its healthy margins. The ratings are, however, constrained by the moderate scale of the company’s operations, restricting its operational flexibility to a certain extent. However, with the start of commercial operations for the expanded capacity, the scale is expected to improve, going forward. Allchem operates in a very competitive industry, exposing it to pricing pressure, which can affect its margins. API manufacturers, which are the end customers for the company, are subject to regulatory oversight, and thus, the company is also expected to maintain a high level of quality standard in its operations. Allchem’s profitability also remains exposed to adverse volatility in raw material prices and forex rates. The company is a net exporter and does not have any hedging policy in place. ICRA also notes that the company’s manufacturing facility was audited by USFDA in Q1FY2025, and the company received the approval thereafter. This is expected to support the business prospects of the company.