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Rating driven by pledge of shares of Aurobindo Pharma Limited & promoter support
ARIPL had issued Non-convertible debentures (NCDs) of Rs.850 Cr in 2 tranches in Q4FY2021 with maturity period of 37 months from the dates of issuance (maturity date falling in FY2024 & FY2025, respectively). The total NCDs of Rs.850 Cr raised by ARIPL are secured by way of pledge of equity shares of Aurobindo Pharma Limited (APL); held by RPR Enterprises (RPR). As per the final term sheet shared by ARIPL for the Rs.850 Cr of the NCD, the stipulated asset cover is 2.0x during the entire tenor of the NCD, with the top-up trigger at 1.80x and top-down trigger ratio in the range of 2.35x to 2.67x. During the tenure of the NCDs, total indebtedness across all entities that are secured via pledge or encumbrance, or otherwise assured by underlying shares held by the promoter group shall not exceed Rs. 4,420 Cr. The aforementioned NCDs were utilized to fund the acquisition of KSEZ and KSL.
ARIPL has informed Acuité on the early redemption of the 25 percent of the NCDs (around Rs.212.50 Cr) taking place in April 2022. Acuité is in receipt of confirmation from the investor – JP Morgan (through its subsidiary – Copthall Mauritius Investment Limited) along with letter from National Security Depositary Ltd (NSDL) on redemption on the Rs.212.50 Cr of NCDs. The NCD redemption was funded through redemption of cumulative convertible debentures (CCDs) from promoters and inter-corporate deposits (ICDs) from group entities.
Aurobindo Pharma Limited (APL), headquartered in Hyderabad, is a vertically-integrated pharmaceutical formulations manufacturer. It has 17 formulation manufacturing facilities (three in the US, one in Brazil, one in Netherlands and one in Portugal) and 11 active pharmaceutical ingredients manufacturing facilities. The facilities have regulatory approvals from major international agencies. The market capitalization of APL was ~Rs.37,204.17 Cr as on April 28, 2022. Its investor base includes leading domestic and foreign institutional investors. As on March 31, 2022, the promoter and promoter group holds 51.83 percent. Of this, RPR Enterprises and other holding companies belonging to the promoter group and family held 36.61 percent (RPR Enterprises was 33.51percent). As on March 31, 2022 out of the total Promoter Group shareholding, 14.05 per cent was encumbered and the balance remained unencumbered, indicating significant flexibility to raise additional funding/offer top ups to existing NCD holders, if necessary. As regards RPR, the extent of pledge is 10.7 percent with remaining being unencumbered. The rating also factors in the clauses related to events of defaults, prepayments and additional share-backed indebtedness. Acuité believes that the promoters of APL will continue to support the debt servicing commitments under the NCDs issuances. The financial flexibility of the promoters (in terms of value of unencumbered shares in APL viz-a-viz pledge based borrowings) will be a key credit monitorable over the near to medium term.
ARIPL has completed acquiring 99.74 percent stake in Kakinada SEZ Limited in FY2022 by investing Rs.1,704 Cr (vis-à-vis earlier estimate of Rs.1,600 Cr). As part of the transfer of stake of KSEZ, majority of equity stake of Kakinada Gateway Port Ltd (KGPL) held by KSEZ has also been transferred to ARIPL. Total consideration for the sale of equity stake as well as the sub-debt in KSEZ is Rs.2,610 Cr. Out of the total consideration, Rs.1,704 Cr was paid on the deal closing date and balance would be to be paid in next 2 to 3 years, which is contingent upon certain agreed milestones (being the sale of land is higher than the threshold value). ARIPL has also acquired 41.12 percent of stake in Kakinada Seaports Ltd (KSL) in FY2022 for a total consideration of Rs.494 Cr as a strategic investment. The acquisition was funded through Loan against Securities (LAS) of around Rs.1,735 Cr along with term loans from Yes bank at KGPL level and through sale proceeds from KSEZ.
ARIPL had an unexecuted order book of ~Rs.4,732 Cr as on March 31, 2022 comprising the construction of commercial and residential projects (Kohinoor Phase I & II and ‘The Regent’) under ARPL and Plerum. ARIPL has diversified its order book further by winning the bid for a road project in Mamallapuram and infrastructure projects in Ramyapatnam worth Rs.248.5 Cr and Rs.2,647.6 Cr, respectively. The order book is to be executed in next 12-36 months, providing medium to long term revenue visibility. In addition, various other projects are in pipeline for construction of residential projects which will further boost ARIPL’s order book over the longer run. Acuite believes that though the strong order book provides healthy revenue visibility, the progress in execution of the ongoing orders will remain an important monitorable.
ARIPL intends to develop as a diversified EPC player with presence in Real-estate (presence across all sectors of commercial, retail, and residential), Infrastructure (including highways, irrigation, and ports), Industrial Parks (including SEZ) and Mining segment to handle the rapidly growing business opportunities. As part of its business focus on Mining, ARIPL had bidded for multiple mines and won 2 major coal blocks during FY2021 and 1 in FY2022. During FY2021, ARIPL has also taken footstep into infrastructure domain by winning the Ramayapatnam Port EPC contract and Mamallapuram Road HAM Project. ARIPL also invested Rs.1,704 Cr towards acquisition of 99.74 percent stake in Kakinada SEZ Limited from GMR group and 74 percent stake in Kakinada Gateway Port Limited. ARIPL also acquired 41.12 percent stake in Kakinada Seaports Limited by investing Rs.494Cr. During FY2020, ARIPL had outstanding LAS of Rs.175.40 Cr which increased to Rs.1,735 Cr as on March 31, 2022. While the leverage at ARIPL went up in FY2021, the additional debt has been primarily against its foray into the mining, industrial parks and infrastructure space and against assets and investments.
In order to improve the structure of its debt, ARIPL has replaced its LAS borrowings by availing project specific loan of Rs.850Cr at Kakinada SEZ level and Rs.925 Cr (loan against receivables and construction finance) at ARPL level. The main intention to avail these loans is to reduce the LAS outstanding at RPR group level so that the short term LAS loans can be converted to project specific loans which subsequently be serviced from the project cashflows. The debt against share pledge holds higher risk as it has moderate refinancing risk and shorter tenures.
ARIPL has derived continuous tangible support from RPR enterprises, resulting in increased financial flexibility. RPR holds 33.51 percent (10.7 percent pledged as on March 31, 2022) stake in APL. RPR Enterprises along with other promoters and promoter group companies has infused ~Rs.730 Cr as on March 31, 2021 and Rs.1,200 Cr (of which Rs.1,150 Cr was repaid back in same year) in ARIPL by way of equity, compulsory convertible debentures (CCDs), inter corporate deposits to fund the acquisitions.
Acuité understands that any additional funds required to meet the equity obligations in ARIPL’s subsidiaries would be provided by the parent or from the company’s surplus cashflows. ARIPL is strategically important to the promoter and the group as a whole, as reflected by the extension of personal guarantees by Mr. P Sarath Chandra Reddy (ultimate beneficiary of RPR) and Mr. P Rohit Reddy (Director of ARIPL and Ultimate beneficiary of RPR) for the bank/Financial institutions/NBFC loans by ARIPL. Similar kind of support is there for KSEZ. RPR enterprises has along with RPR Sons advisors Pvt Ltd and ARIPL has provided corporate guarantee against the term debt raised along with personal guarantees by the promoters. Acuite believes that such financial support will continue to aid ARIPL’s financial risk profile and liquidity over the medium term.
ARPL had way back in FY2019/FY2020 bought 25 acres of land under ARPL worth Rs.482 Cr for construction of Kohinoor Phase – I and a retail mall named Auro Retail Mall which was to be given on lease to LULU International. In March 2021, management planned not to go ahead with Auro Retail mall, instead plan phase II of Kohinoor given the healthy bookings in phase I. The company had repaid Rs.78 Cr of loan drawn down from Yes bank and returned Rs.40 Cr of security deposit to LULU International taken for the mall construction. For Kohinoor – I, the bookings have reached at 85 percent as on March 31, 2022 vs 55 percent as on September 2020. ARPL witnessed healthy bookings in Kohinoor-I and launched Kohinoor Phase-II in the land parcel kept for the retail mall. Kohinoor-II was launched in May 2021 and is expected to get completed by March 2024. The project has received bookings of 59 percent already against 15 percent of cost incurred and 17 percent of customer advances received as a % of total sale value as on March 31, 2022. Subsequent to the success of Kohinoor projects, ARIPL launched ‘Regent’ for which 40 percent of the area is sold against construction cost of 8 percent and customer advances of 9 percent. ARPL has in pipeline 4-5 residential projects at a larger scale wherein the procurement of land parcels or statutory approvals are under progress. Moreover, in RDL, the project commercial project has been completed and 20 percent of leases were held by APL and 62.8 percent occupied in total and as on March 31, 2022.
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KSEZ has a land parcel (excluding land commitments to farmers/weaker housing society, among others) of 7,069 acres (Gross area), of which around 1,500 acres is pertaining to the construction of Kona Port and the balance would be used towards the development and sale to various sector-specific entities. Of the overall available land of around 5,682 acres (other than infrastructure), KSEZ plans to sell around 4,371 acres to various sectors for setting up their facilities. KSEZ is planning to sell around 1,000 acres for setting up of refinery/petrochemical plants. While Haldia Petrochemicals Limited) had entered into a MOU with the government of AP to set up a refinery a 9.5-million metric tonnes per annum refinery for around 2,000 acres in Kakinada. KSEZ is also in talks with other petrochemical players. Similarly, KSEZ plans to sell around 2,700 acres of land for setting up pharma facilities. Of this, 423 acres has been sold to APL in FY2022 for setting up facilities under three Production Linked Incentive Schemes. This will act as an anchor for other players to come in. The other sectors, which KSEZ is focusing on, are downstream petrochemical plants, agro and food-based, and marine and animal products. KSEZ is expected to incur a capex of around Rs.1,000 Cr during FY2023-FY2026, which is likely to be funded through bank debt and internal accruals/subordinated unsecured loan/equity by availing support from the ultimate promoter. Acuite believes that traction in KSEZ land sales and its subsequent cashflows will remain key monitorable to meet its debt obligation over the medium to long term.
ARIPL’s consolidated debt coverage (Debt/EBITDA) has been high at 12.03 times as on March 31, 2021 with total debt reaching Rs.2,090.60 Cr against EBITDA of Rs.96.03 Cr. While the debt coverage is likely to improve marginally in FY2022, it is estimated to remain moderately high given most of the projects are under construction or in the initial stages of commencement. The coverage levels are likely to improve further over FY2023-FY2025, post the completion of the on-going projects, receipt of cash flows from the residential projects, land sales from KSEZ and traction in mining operations.
The rating is based on pledge of shares of APL held by RPR Enterprises. The NCDs will be for period of 3 years 1 month with a bullet repayment structure (including accrued interest till date of redemption); of which 1 year has already passed by. The clauses pertaining to ‘Prepayment Event’ also include a drop in market capitalization of APL by 50 percent from the date of financing. In the event of such a sharp drop, the lenders are entitled to seek early repayment of the NCDs. As the rated instruments are long term in nature, the downside risk of stock will be elevated. Since the stock market is prone to volatility, occurrence of events such as slowdown in FII flows, sharp depreciation in domestic currency, political events, and other such macroeconomic events, can cause decline in stock prices. These are events which could impact the overall indices causing a general downtrend in prices. Additionally, company specific factors such as lower-than-expected performance, regulatory actions etc. can also influence movements in stock prices. Acuité believes that in view of the long term nature of the proposed NCDs and the sensitivity of the proposed NCDs to the volatility in the market price of APL, any material decline in the market capitalization of APL will impart a negative bias to the rating. Any sharp and continuous decline in share prices could potentially lead to challenges in adhering to the covenants.
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