S&P upgrades Glenmark to 'BB' on expectation of conservative debt levels

The outlook is stable reflecting the view that Glenmark will maintain its financial policy such that its FFO-to-debt ratio will remain comfortably above 30%, S&P said

Standard and Poor’s (S&P) has upgraded long-term issuer rating on Glenmark Pharmaceuticals from “BB-” to “BB” on the expectation of conservative debt levels given limited upcoming capital investments and healthy free operating cash flow.

Its debt is likely to decline by about 25 per cent in FY22 (year ending March 31, 2022) given management's commitment to maintaining lower leverage following a recent equity raising at its subsidiary. This is expected to boost the company's ratio of funds from operations (FFO) to debt is expected at 35-40 per cent in FY22.

The outlook is stable reflecting the view that Glenmark will maintain its financial policy such that its FFO-to-debt ratio will remain comfortably above 30 per cent, the rating agency said in a statement.

S&P said Glenmark will likely prioritise debt reduction over the next 12-18 months. It expected the company to repay up to Rs 1,600 crore in debt during FY22 in line with the management's commitment to deleverage.

Glenmark's subsidiary, Glenmark Lifesciences Ltd, concluded its public equity offering in July 2021 and raised about Rs 1,500 crore. Subsequently, Glenmark repaid about Rs11 billion of its outstanding borrowings.

“We believe Glenmark will direct its surplus operating cash flow over the next few quarters toward further debt reduction to meet its stated target”. Thereafter, the company's adjusted gross debt is expected to remain stable at Rs 35-40 billion over fiscals 2022 and 2023, compared with Rs 5,100 crore at the end of FY21.

Glenmark's healthy revenue growth and cost optimisation measures, including reduced investments (measured as a percentage of revenues) in research and development (R&D), will bolster its operating cash flow. The company is estimated to generate Rs 1,200-1,400 crore in operating cash flow annually over FY22 and FY23.

Moreover, Glenmark has limited upcoming capital investment requirements over this period. Capital spending of Rs 600-700 crore annually should be restricted to maintenance and minor capacity enhancements--adequately covered by its operating cash flow, in our assessment, it added.

The rating agency said the new product launches and favorable operating conditions should support growth. Glenmark's revenue from India, Europe and other international markets will continue to rise over the next 12-18 months.

India, the company's largest market, accounts for more than 30 per cent of overall revenues and we expect revenue from the country to grow 15-20 per cent in FY22.

Sales for the company's base portfolio of products across segments such as diabetes, consumer care, dermatology and respiratory will likely rise. However, stabilizing Covid-19 infection rates could lead to lower sales of FabiFlu (oral antiviral used to treat Covid-19 patients) in the coming quarters, with the medicine accounting for about 10 per cent of FY22 revenue from India.