CARE has assigned a CARE A (Single A) rating to the proposed Secured Non-Convertible Debenture (NCD) Issue of Rs.100 crore of Arch Pharmalabs Ltd. (Arch). The NCDs would be repayable in four equal yearly installments, starting from the end of second year from the date of placement.

The rating factors in Arch’s established position as bulk-drug/API manufacturer, well equipped R&D facilities, existing long term contracts with clients, world leader position in isoxazole penicillin side chains, strong growth in revenues over the last three years, established export network and foray into Full Time Equivalence (FTE) services. The rating is however, constrained by relatively small size of operations, high overall gearing, high working capital intensity, negative free cash flow and limited access to capital market.

Arch Commerz Pvt. Ltd. (APCL), a company promoted by first generation entrepreneurs reversed merged itself into a sick Company, Merven Drugs Pvt. Ltd (MDPL) as per the rehabilitation scheme sanctioned by BIFR, to create a single entity which was renamed as Arch Pharmalabs Ltd (Arch) in March 2004.  BIFR vide its order dated October 5, 2004, declared the company to be out of the purview of BIFR.  Subsequently, Arch was delisted w.e.f. August 14, 2006.

Arch is into manufacturing of Pharmaceutical Intermediates and APIs as a contract manufacturer. It has 6 manufacturing facilities across India and one subsidiary outside India.  The company  has “Export house”  status  and  most  of its facilities are WHO-cGMP and ISO 9001-2000 certified.

Arch plans to add an additional capacity of 70 TPA at its Gurgaon facility. It also plans to upgrade and enhance its R&D facilities at Taloja and Badlapur. For the same, Arch has raised equity aggregating Rs. 59 crore from ICICI Venture Capital Ltd during FY’07.

Sales turnover of Arch had increased by a CAGR of 37% over the past three years with various acquisitions and increase in capacity. Arch earned around 65% of its sales revenue (Rs.247 crore) from intermediaries and remaining 35% from APIs during FY’06 as compared to 95% and 5% respectively during FY’05. However, Arch earned around 61% (Rs.150 cr) from sale of isoxazole penicillin side chains during FY’06, which exposes it to a single product category risk.

The company has entered into long term contracts with the clients, generally for 5 years, with renewable clause. Arch has been able to maintain its margins on increased turnover over the last four years. PAT margins have remained between 6-8% over the last three years. Overall gearing at 2.38, as on March 31, 2006 was high. 

Sourced From: Careratings