Rationale

 ICRA has taken a consolidated view of Bal Pharma Limited (BPL / the company), which includes BPL and its subsidiaries (Lifezen Healthcare Private Limited, Balance Clinics LLP, Bal Research Foundation and Golden Drugs Private Limited), while assigning the credit ratings, given the common management and significant operational and financial linkages between them. Together, they are hereby referred to as BPL/the Group/the company. The outlook revision on the long-term ratings for the company considers its improving credit profile following the continued healthy demand for its products under both Active Pharmaceutical Ingredients (API) and formulations segments in the domestic and International markets. Although supply chain constraints and commodity price inflation continue to weigh on the industry, the situation is expected to ease subsequently. The revision in outlook also takes into account the approval received by the company for the production linked incentive scheme (PLI) 2.0 scheme. This is expected to support the company's cash flows given that the BPL is expected to receive Rs. 50.0 crore as incentive over a period of six years under this scheme which will be deployed towards the capital expenditure and R&D expenses incurred by the company. The ratings remain supported by extensive experience of the promoters in the pharmaceutical industry and the well-diversified customer base of the company across domestic and export markets. The ratings also take into account BPL's manufacturing capabilities and its established position as a manufacturer of the anti-diabetic bulk drug, Gliclazide wherein it commands healthy market share in both domestic and export markets. The ratings also factor in the USFDA and EU GMP approved facilities which are expected to support revenue growth, primarily in regulated markets. In H1 FY2022, the company posted revenues of Rs. 138.5 crore (Rs. 116.7 crore in H1 FY2021) aided by healthy business under API and formulation segments and healthy demand for its products in both domestic and international market. The company's operating margins stood at 10.4% in H1 FY2022 (PY: 10.4%) supported by relatively higher scale, improved product mix, backward integration and various cost control initiatives adopted by the company. The company has confirmed order book position of ~Rs. 50 crore which is to be executed in next three months and is expected to support the revenue growth of the company in FY2022. The ratings remain constrained by BPL's average financial risk profile characterised by a leveraged capital structure and moderate debt protection indicators. Gearing stood at 1.9 times as on Sep 30, 2021 (2.1 times as on March 31, 2021). Interest coverage stood at 2.5 times, Total Debt/OBITDA at 3.7 times and DSCR of 1.5 times in H1 FY2022 as compared to 2.0 times, 4.6 times and 1.4 times respectively in FY2021. With moderate major capex plans, scheduled repayment of the term loans and expected equity infusion (Rs. 2.82 crore in FY2023) and cash inflows from the PLI scheme, the debt coverage indicators are expected to improve going forward. Further, the ratings factor in the high working capital intensity of operations resulting in high utilization of its working capital borrowings. The ratings also remain constrained by the intense competition in the API and formulations business with limited pricing flexibility and the nascent stage of operations of the over-the-counter (OTC) business.