December 02, 2020

HealthCaps India Limited: Ratings reaffirmed

Summary of rating action

Previous Rated Amount Current Rated Amount
Instrument* Rating Action
(Rs. crore) (Rs. crore)
Fund-based- Cash Credit 23.00 27.87 [ICRA]BBB+ (Stable); reaffirmed
Fund-based- Term loan 30.05 25.18 [ICRA]BBB+ (Stable); reaffirmed
Non-fund Based 7.50 7.50 [ICRA]A2; reaffirmed
Total 60.55 60.55
*Instrument details are provided in Annexure-1

Rationale
The ratings reaffirmation takes into account the slight increase in HealthCaps India Limited’s (HIL) operating income (OI)
in FY2020, although accompanied with a decline in operating margins. Moreover, the company is expected to report
healthy growth in OI in the current fiscal on account of strong demand from overseas markets.

The ratings continue to positively factor in HIL’s established market position in the empty hard gelatine capsule (EHGC)
segment, its diversification into hydroxy propyl methylcellulose capsules (HPMC) and the encouraging demand owing to
growth in the pharmaceutical segment with the ongoing Covid-19 pandemic. The ratings continue to be supported by the
company’s healthy profitability margins and moderate debt coverage indicators. The ratings further derive strength from
the company’s long relationships with its customer base, which has resulted in continuously high capacity utilisation over
the years.

The ratings, however, remain constrained by HIL’s moderate scale of operations, albeit steady improvement over the
years. ICRA notes the company’s debt-funded capex towards expansion, which results in high debt repayment burden.
This, along with the steady capex undertaken in the past few years, has impacted the company’s return metrics. The
ratings continue to be constrained by the relatively high working capital intensity of operations owing to the long
collection period offered to customers, coupled with high inventory holding levels. ICRA also notes the foreign exchange
risk associated with the company.

The Stable outlook on the [ICRA]BBB+ rating reflects ICRA’s opinion that HIL will continue to benefit from its long track
record of operations and healthy financial risk profile.

Key rating drivers and their description

Credit strengths
Long presence of HIL in capsule industry – The promoters have more than three decades of experience in the capsule
segment and the company has a large product portfolio in EHGC. It has diversified into HPMC capsules, which are
vegetarian capsules and have healthy demand prospects in overseas market. Further, HIL has early mover advantage in
HPMC capsules.

Encouraging demand in domestic as well as overseas market – The company has been continuously expanding its
capacity over the last three years to support the end-segment demand. HIL is now one of the leading EHGC and HPMC

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capsule manufacturers in India with an installed capacity of 10.5 billion capsules per annum as on March 31, 2020.
Further, currently the demand for capsules have increased in the domestic as well as overseas market due the ongoing
pandemic. Following this increased demand, HIL is further expanding its installed capsule manufacturing capacity.
Diversified customer profile – The company has a wide customer base in domestic as well as export markets. In the past
few years, the company has been able to penetrate into Europe, the Middle East and the South American markets as well
as increase its revenues from the exports market. Furthermore, the related companies (AlfaCaps LLC in the US and
HealthCaps Europe Ltd in Europe) directly cater to the demands of small players based in the US and Europe, thereby
increasing its export revenues.

Comfortable capital structure and profitability margins – The capital structure of the company remains healthy, given
the continuous reserve accretion supported by healthy profitability margins. However, debt levels have increased over
the last three years in the backdrop of continuous capex. The company’s operating profitability also remained stable and
healthy at around 17%, supported by its balanced mix of exports and domestic sale. The coverage indicators were also
comfortable with TD/OPBDITA at 2.4 times, interest coverage of 4.3 times and DSCR of 1.7 times as on March 31, 2020.

Credit challenges
Moderate scale of operations – Despite the continuous growth in OI over the past five years, the scale of HIL’s
operations has remained moderate. Nonetheless, the demand is steady, given the consumable nature of the product in
the end segment. Also, positive demand due to Covid-19 and ramping up of HPMC division should help revenues grow
substantially in the medium term.

High working capital intensity – The company witnessed a high working capital intensity in the last three years on
account of increased stock-holding period after the start of the HPMC division as it is maintaining additional inventory for
the segment and for additional rush orders. Furthermore, due to HIL’s increasing focus on exports and start of the HPMC
division, the receivable cycle has elongated with the company offering more credit period to new clients. However, ICRA
notes that the company’s working capital limits are moderately utilised, thereby supporting liquidity.

Moderate foreign exchange risk – Being a net exporter, the company is exposed to forex risks. Also, approximately 30%
of the raw material is imported, the availability of which remains crucial. However, with increased demand due to Covid-
19 and HIL’s increasing exports, the company has taken forward contracts for Pound sterling hedging. However, HIL has
not taken any hedging for US dollars.

Liquidity position: Adequate

The liquidity position of HIL is adequate, given that the company has cash and liquid assets of ~Rs. 3.04 crore as on
September 30, 2020. Further, the working capital limits have adequate buffer of ~23% with an average utilisation of
~77% on the sanctioned lines during the 15-month period ending in October 2020. Overall, ICRA expects HIL to be able to
meet its near-term commitments through internal as well as external sources of cash and still be left with sufficient cash
surpluses.

Rating sensitivities
Positive triggers – ICRA could upgrade HIL’s rating if the firm demonstrates a sustained revenue growth and
improvement in its profitability and liquidity position.

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Negative triggers – ICRA could downgrade HIL’s rating if, there is a weakening in the company’s revenues and
profitability or deterioration of capital structure and return indicators owing to any sizeable debt-funded capital
expenditure. Specific credit metrics could include Total Debt/OPBIDTA above 2.6 times on a sustained basis.

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Analytical approach
Analytical Approach Comments
Applicable Rating Methodologies Corporate Credit Rating Methodology
Parent/Group Support Not applicable
Consolidation/Standalone Standalone

About the company

Incorporated in 1983, HIL is incorporated by Mr. Chiranjiv Singh and manufactures EHGC capsules. Further, HIL has
diversified into manufacturing of HPMC capsules from FY2017 to cater to the need of the health and nutrition industry.
HIL manufactures capsules in sizes of 00, 0, 1, 2, 3 and 4. The manufacturing facility of the company is in Fatehpur,
Punjab. The company has sales offices in Delhi, Mumbai and Mohali. It also exports the capsules to various prestigious
international clients and has a customer base of over 350 clients in more than 50 countries across the world. The facility
is WHO-GMP certified and has Drug Master File (DMF) registered with USFDA.

Key financial indicators (audited)

FY2019 FY2020
OI (Rs. crore) 102.17 108.15
PAT (Rs. crore) 10.09 8.26
OPBDIT/OI (%) 20.57% 17.28%
RoCE (%) 17.79% 13.53%

Total Outside Liabilities/Tangible Net Worth (times) 1.28 1.23

Total Debt/OPBDITA (times) 1.99 2.40
Interest Coverage (times) 6.17 4.33
DSCR 2.60 1.72

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years
Current Rating (FY2021) Rating History for the Past 3 Years
Instrument Amount Amount Rating FY2020 FY2019 FY2018
Type
Rated Outstanding
2-Dec-20 09-Oct-2019 17-Jul-2018 -
[ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB+
1 Cash Credit Long Term 27.87 - -
(Stable) (Stable) (Stable)
[ICRA]BBB+ [ICRA]BBB+ [ICRA]BBB+
2 Term Loan Long Term 25.18 25.18 -
(Stable) (Stable) (Stable)
3 Letter of Credit Short Term 7.50 - [ICRA]A2 [ICRA]A2 [ICRA]A2
Amount in Rs. crore

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
ISIN Instrument Name Date of Coupon Rate Maturity Amount Current Rating and
Issuance / Date Rated Outlook
Sanction (Rs. crore)
NA Cash Credit NA NA NA 27.87 [ICRA]BBB+ (Stable)
NA Term Loan FY2014 10% FY2026 25.18 [ICRA]BBB+ (Stable)
NA Letter of Credit NA NA NA 7.50 [ICRA]A2
Source: HIL

Annexure-2: List of entities considered for consolidated analysis

Company Name Ownership Consolidation Approach
NA NA NA

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ANALYST CONTACTS
K. Ravichandran Manish Ballabh
+91-44-45964301 +91-124-4545812
ravichandran@icraindia.com manish.ballabh@icraindia.com

Gaurav Singla Geetika Mamtani

+91-124-4545366 +91-124-4545832
gaurav.singla@icraindia.com geetika.mamtani@icraindia.com

RELATIONSHIP CONTACT
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
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For more information, visit www.icra.in

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