Karachi, August 11, 2021 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Saakh Pharma (Private) Limited (SPPL) at ‘BBB+/A-2’ (Triple B Plus/A-Two). Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on February 25, 2020.
Ratings reaffirmation factors in the company’s prominent position in API manufacturing business amongst its peers along with healthy recovery posted in sales and bottom-line in the outgoing fiscal year. While ratings continue to derive support from stable and growing demand of pharmaceutical sector together with competitive advantages enjoyed by local API manufacturers (vis-a-vis imports), enhanced focus by management towards process improvement, cost optimization and enriching product suite has been noted.
The ratings remain constrained by limited quantum of cash flows and vulnerability of earning profile to exchange-rate and imported supply chain risk. Managing leverage indicators that have trended upwards on a timeline basis is important given that higher working capital requirements has necessitated increase in utilization of short-term debt. Capitalization levels also remains limited in terms of size. Going forward, ratings are dependent on achieving the envisaged business growth targets while profitability and liquidity profile to be aligned with the improving size. Moreover, room for improvement exists in terms of corporate governance framework.
Pharmaceutical sector is highly dependent on imports to meet the demand of basic raw material – APIs (primary process in pharmaceutical manufacturing). As per estimates, Pakistan’s API market stands at ~Rs 100b and 95% of it is being imported (mainly from China, Germany, UK, USA and France). Extended time frame for licensing, increasing working capital requirements, strict regulatory compliance and quality control standards act as entry barriers in API manufacturing industry to a certain extent. Duty and tariff protection provide price advantage to local API manufacturers. Moreover, pharmaceutical firms enjoy the convenience of lower lead time, limited exposure to exchange rate risk and facility of procuring desired quantity which in turn provides additional competitive advantage to local API industry.
Sales growth remained subdued in FY20 due to non-production days because of pandemic-induced supply chain disruptions. However, following the ease in pandemic restrictions globally after first wave and given subsequent economic recovery, the growth trajectory has continued. Margins have remained under pressure during the period under review; however, exchange gain significantly supported the bottom-line profitability. Going forward, sales growth will stem from new product additions (Ibuprofen planned to be added in portfolio in the ongoing year) and enhanced capacities which will drive the profitability growth.
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Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
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