The proposed transfer of Jubilant Pharma Ltd's active pharmaceutical ingredients (API) business to its parent—Jubilant Pharmova Ltd (JPHL) will not affect JPL's ratings, says Fitch Ratings.
In a report, the ratings agency says, "We currently assess JPHL's credit profile to be weaker than that of its subsidiary - JPL - under our parent and subsidiary linkage rating criteria. This is because JPL and its subsidiaries account for the bulk of JPHL's consolidated operating cash flow. The reorganisation will add to cash flow at JPHL's standalone level, but its scale will continue to remain significantly lower than that of JPL."
"This underpins our view that JPL will continue to have a stronger credit profile than the parent, despite JPL's slightly higher leverage. The linkages will remain strong after the reorganisation, in our view, as JPHL will continue to exercise control over JPL with its 100% stake," it added.
Fitch says, the reorganisation is unlikely to change its assessment of linkages between JPL and JPHL and it will continue to rate JPL based on the parent's consolidated profile which will remain unaffected by the reorganisation.
The ratings agency expects JPL's financial profile to remain comfortable, as the API busines's limited earnings contribution will minimise the impact. JPHL aims to complete the reorganisation over the next year, subject to receipt of certain regulatory and other approvals, including those from the lenders.
The API business, currently held under JPL's wholly-owned subsidiary Jubilant Generics Ltd (JGL) in India, contributed less than 15% of JPHL's consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) in the financial year ended March 2021 (FY20-21).
JPHL intends to demerge the business from JGL and merge it with itself on a going-concern basis, along with the associated working capital debt. JPHL aims to enhance efficiency and widen the scope of offerings by bringing the API business closer to contract research and development activities and leveraging integration and common management.
The API business will cease to be a part of the restricted group, as defined in the US dollar bond indenture, after the reorganisation. The bondholders will no longer have direct access to API business's cash-flow, but credit metrics at the JPL level will remain comfortable.
JPL reported a net debt-to-EBITDA ratio of 1.6 times at FYE21 and EBITDA-to-cash interest of 5.4 times.
"We expect a comfortable headroom under the incurrence covenants governing JPL's ability to obtain incremental debt under the bond indenture, underpinning its robust financial flexibility," Fitch added.