VIS downgrades entity ratings of Macter International Ltd.

September 18, 2019 (MLN): VIS Credit Rating Company Limited (VIS) has downgraded entity ratings of Macter International Limited (Macter) from ‘A/A-1’ (Single A/A-One) to ‘A/A-2’ (Single A/ A-Two). Outlook on the assigned ratings is ‘Stable’.

The long-term rating of ‘A’ signifies good credit quality; protection factors are strong. Risk is modest but may vary with the possible changes in economy.

The short-term rating of ‘A-2’ signifies good certainty of timely payment; liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small.

The assigned ratings incorporate low business risk of the pharmaceutical sector in the long run given the relatively non-cyclical nature of the sector with stable demand and demographic profile of the country.

However, delays in regulatory approvals for increase in product prices and introduction of new products, rupee depreciation and significant dependence on Drug Regulatory Authority of Pakistan (DRAP) for approval of hardship cases continue to remain key risks affecting the industry in the short term.

Ratings also incorporate existing low market share in pharma sector, modest therapeutic area diversity and weakening in financial profile given the rupee depreciation.

Macter is present across 48 therapeutic segments through its portfolio of 80 products. Product wise concentration risk is considered to be on the lower side as top 5 products of the company account for approximately one-third of the company’s revenues.

We have been given to understand that Macter was one the fastest growing company in terms of revenues from new products launched amongst all pharmaceutical firms in the country during the last three years.

In view of the management’s plan to introduce new products, product-wise concentration may further improve over the medium term. Ability of the firm to compete in its existing product segments and achievement of budgeted growth continue to remain important rating drivers.

Topline of the company has depicted a decreasing trend during the last two financial years primarily on account of lower tender business.

Margin attrition has also taken place on account of rupee depreciation and limited room to increase product prices.

Going forward, one-time price increase in the range of 9%-15% allowed by Drug Regulatory Authority of Pakistan (DRAP) in addition to allowed CPI increase is expected to limit downside risk of gross margins of the company during FY20.

Over the medium term, rupee depreciation is expected to remain on the lower side vis-à-vis the preceding 18 months; hence profitability of the company is expected to remain stable.

With decreasing profitability of the company, cashflow coverage metrics have also declined. Growth has been witnessed in the quantum of overall debt on a timeline basis on account of higher capex and working capital requirements. Resultantly, leverage and gearing ratios of the company have trended upwards.

Going forward, ratings will continue to be dependent on maintenance of leveraging profile and cash flow coverage within benchmarks for the assigned ratings.