Ind-Ra-Hyderabad : India Ratings & Research (Ind-Ra) has assigned Silicon Drugs & Intermediates Pvt Ltd (Silicon Drugs) a Long-Term Issuer rating of ‘IND BB’. The Outlook is Stable. Silicon’s bank facilities have also been assigned ratings as follows:

Long-term loans INR40m:‘IND BB’

Fund-based working capital limit INR15m:‘IND BB’/ ‘IND A4+’

Non-fund-based limit INR20m:‘IND A4+’

Key Rating Drivers

The ratings reflect Silicon Drugs’ stretched working capital cycle and liquidity pressure as indicated by its average cash credit utilisation of over 90% for the 12 months ended 28 February 2013. The ratings also reflect high customer concentration risk for the company. For the 11 months ended 28 February 2013 (11MFY13), 62.4% (FY12: 73%) of total sales were to its group company VVR Organics Pvt Ltd and 92.2% (FY12: 95.6%) of total revenue came from its top three customers.

However, the ratings are supported by Silicon Drugs’ strong EBITDA margin of 12.5% for 11MFY13, though it declined from 21% in FY12 due to a substantial increase in raw material prices and competition from new players. Also, credit metrics are moderate with interest coverage of 2.5x (FY12: 2.3x) and net financial leverage of 2.4x (FY12: 3.4x). The slight improvement in metrics is because of debt repayments and an EBITDA increase to INR15m from INR13m due to higher sales. The ratings also factor in the over 20 years of experience of the company’s founders in the pharmaceutical industry and its group support.

Rating Sensitivities

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– interest coverage below 2.0x

– further deterioration in liquidity position and increase in customer concentration

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

– interest coverage over  3.5x

– an improvement in liquidity position and customer diversification