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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 topdown 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.209.90 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.209.90 Cr of NCDs. The NCD redemption was funded through issue 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.36,178.20 Cr as on April 28, 2023. Its investor base includes leading domestic and foreign institutional investors. As on March 31, 2023, 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 39.69 percent (RPR Enterprises was 33.51percent). As on March 31, 2023 out of the total Promoter Group shareholding, 17.39 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 20.27 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.
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Healthy revenue Visibility; Diversified order book
ARIPL had an unexecuted order book of ~Rs.9.260.10 Cr as on March 31, 2023 comprising the construction of commercial and residential projects (Kohinoor Phase I & II & III, The Peral I & II , The Regent Phase I & II, Khajaguda residential) under ARPL and Plerum, infra projects. ARIPL has diversified its order book further by winning the bid for a irragtion project of Jal Jeevan Project with AP Govt and one road project in Vakalpudi worth Rs.1056.67 Cr and Rs.1031 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. Acuité believes that though the strong order book provides healthy revenue visibility, the progress in execution of the ongoing orders will remain an important monitorable.
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Foray into Coal Mining segment
ARIPL has forayed into mining segment by winning bids for 3 commercial mining coal blocks and 2 Rock phosphate mines - TakliJena-Bellora North and South and Urma Paharitola in the E-Auction For Coal Mines Under 11th Tranche , Beheraband North Extn. Recently in January 2023 they have won Khatamba and Kachaldhara Rockposhpate project and . Management is expected to provide further clarifications on this segment in near term once the tie-up for initial capex if completed. Management is exppects to start the operation by FY2024 for takli jena and for the other coal mines , may take another 2 years for operations. However, Acuité derives comfort from the strong financial flexibility of RPR and believes that any additional cash flow requirements would be supported by the parent entity. Acuité will keep monitoring subsequent developments w.r.t. this segment
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Significant improvement in real estate cashflows aiding the EPC inflows at standalone and consolidated level
ARPL witnessed healthy bookings in all the real estate projects and EPC contracts , For Kohinoor – I, the bookings have reached at 85 percent as on March 31, 2023 against 90 percent of cost incurred and is expected to get completed by March 2024. Kohinoor-II . Kohinoor-II was launched in May 2021 and is expected to get completed by March 2025. The project has received bookings of 80 percent already against 50 percent of cost incurred and 62 percent of customer advances received as a % of total booked value. Kohinoor-III was launched in September 2022 and is expected to get completed by March 2026. The project has received bookings of 75 percent already against 19 percent of cost incurred and 20 percent of customer advances received as a % of total booked value. The Regent Phase- I has received bookings of 76.66 percent already against 40 percent of cost incurred and 60 percent of customer advances received as a % of total booked value. Subsequent to the success of Kohinoor projects and Regent phase -I, ARIPL launched ‘Pearl’ Phase -I’ for which 41 percent of the area is sold against construction cost of 32 percent and customer advances of 20 percent. Township Phase - I has received bookings of 80 percent already against 8 percent of cost incurred and 18 percent of customer advances received as a % of total booked value. ARPL has in pipeline 4 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 90 percent occupied in total and as on March 31, 2023.
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Continued financial support from the Parent
ARIPL has derived continuous tangible support from RPR enterprises, resulting in increased financial flexibility. RPR holds 33.51 percent (20.27 percent pledged as on March 31, 2023) stake in APL. RPR Enterprises along with other promoters and promoter group companies has infused around ~Rs.1000 Cr as on March 31, 2023 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. Acuité believes that such financial support will continue to aid ARIPL’s financial risk profile and liquidity over the medium term.
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ARIPL’s consolidated debt coverage (Debt/EBITDA) has been high at 10.63 times as on March 31, 2022 with total debt reaching Rs.3,161.86 Cr against EBITDA of Rs.277.72 Cr. While the debt coverage is likely to improve in FY2023, it is estimated to be 3.76 times in FY2023 given 50 percent of the projects are in completion stage. The coverage levels are likely to improve further over FY2024-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.
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Nascent stage of operations at KSEZ
KSEZ has a land 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 sale or long term lease around 5600 acres to various sectors for setting up their facilities. Out of the 5600 acres of land , 423 acres has been sold to APL in FY22 for setting up facilities under three Production Linked Incentive Schemes. 2000 acres they are planning lease out to Bluk drug park but lease agreement is yet to done. Similarly, KSEZ plans to sell around 2,000 acres of land for setting up of petrochemical plants/integrated steel plants ,already Site Visit completed by large Petrochemicals, Oil and Gas players and Integrated steel Plant companies. Remaining 1200 acres which KSEZ is focusing on green ammonia and other sectors, like agro and food-based, and marine and animal product, downstream petrochemical plants. 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.
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Market Risk arising from adverse movement in stock prices
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 2 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 covenant.
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