Fitch Ratings has today assigned a 'BBB+(ind)' National Issuer rating to Claris Lifesciences Ltd (Claris), with a Stable Outlook. Fitch has also assigned a rating of 'BBB+(ind)' to Claris's outstanding loan term bank loans aggregating INR1,490.7 million and its fund-based cash credit limits of INR1,535m. Fitch has also assigned a rating of 'F2+(ind)' to Claris's fund-based limits of INR415m and non-fund based limits of INR640m.

The ratings reflect Claris's focus on the higher value added injectables market, which has more stable margins, lower price competition and less susceptibility to raw material price fluctuations as compared to other generic segments. However, risks to this margin stability may arise due to the expected increase in competition. The ratings also reflect the company's growing presence in the semi-regulated markets (e.g. Brazil, Mexico, Indonesia etc), its position as one of India's largest injectable players and the company's growing sales and distribution network both in India and other markets. The ratings have also factored in the company's strong operations, with its main injectables plant being approved by the US Food and Drug Administration (FDA). In assigning the ratings, Fitch also considers the moderate financial leverage, comfortable debt coverage indicators and product and geographical diversification achieved by the company, with an increased proportion of revenues coming from less commoditised products.

The ratings are primarily constrained by the lack of an established track record of the company, with its manufacturing facility having started only in 2002. The initial risks are, however, largely mitigated, and the company has demonstrated its ability to exhibit strong growth over the past few years. The ratings are also constrained by the company's large capex plans, wherein it plans to invest over INR3.5 billion over FY08 and FY09 for entry into the biotechnology, oncology and penem segments.

The company is currently looking at an additional equity infusion either by way of private placement or through an IPO to partly finance the above project. Fitch notes that this could act as a positive rating factor. However, any major time and/or cost overruns on the capex program or any greater than expected debt-funded capex/investments materially impacting credit metrics could act as a negative trigger. The company's liquidity is likely to come under pressure if in the scenario of its fund raising plans are delayed, affecting the pace of its capex, but not affecting its operations. The agency also notes that Claris is not exposed to any liability arising from the sponsor family's earlier venture, Core HealthCare limited.

Claris is engaged in the business of developing, manufacturing and marketing primarily injectables which are off-patent (were patent protection has expired) and are primarily in the critical care, hospital care, renal care and nutrition segments. The company's revenues grew at a CAGR of 44% over FY03-FY07, to touch INR5,928m in FY07. The company's margins have, however, grown at a faster rate, with EBITDA margins increasing from 8.9% to 22.6% over the same period. This reflects the increasing contribution from higher value products and the increase in scale of its manufacturing operations. While debt levels have been increasing to finance Claris' expansion plans and working capital requirements, the company's key credit metrics have remained comfortable. Debt/equity and debt/EBITDA ratios were comfortable at 0.73x and 1.7x respectively in FY07. In FY06, Claris raised INR905m from the Carlyle Group's private equity growth fund with the investments made in the form of compulsorily convertible preference shares. Fitch has considered these shares as equity given the fund's expected conversion of the shares.

- June 2008