­Experienced Promoters; long track record with presence in multiple therapeutic segments
LPL is promoted by Mr. A Venkata Reddy who has experience of more than 3 decades in the pharmaceutical industry. LPL’s operations are overseen by Mr. A Venkata Reddy, Mr. Raghu Mitra Alla) and Ms. A. Ratna Kumari (Director), along with a team of qualified professionals, who have extensive experience in the pharmaceutical industry. LPL has over the years expanded its product portfolio with presence across various therapeutic segments; the most demanding ones being anti-diabetic, anti-ulcerative and anti-histamine. LPL derives around 60 percent of revenue from manufacturing of Active Pharmaceutical Ingredients (APIs) and remaining 40 percent from semi-finished and finished formulations. Promoter’s extensive experience has helped LPL in securing repeated orders and establish strong relation with its key customers and suppliers.
Acuité believes that the experience of the management in the industry is also likely to favorably impact the business risk profile of the company over the near to medium term.

Integrated presence across the value chain:
LPL has a strong and well-diversified business model supported by its generic and speciality businesses (with presence in the regulated markets), its branded formulations business (in India and export markets), and forward integration into formulations. The company has the benefit of being vertically integrated for a reasonable portion of its formulations business (~40 percent).

Improving scale of operations and stable profitability levels:
The operating income of the company improved to Rs. 645.28 Cr in FY2022 as against Rs.443.93 Cr in FY2021. In 9MFY2023 the revenues stood at Rs.646.07 Cr. The improvement is driven by both higher volumes and realisations. The company over the last few years has been undertaking continuous capex to increase its production capacities. The Company’s installed capacity rose to 1026000 kgs/pa in FY2022 from 954000 kgs/pa in FY2021. The Company shall increase its production capacity to 132000 kgs/pa by end of FY2023.

The operating margins of LPL has remained stable in the range of 12-14 percent for the last three year ended FY2022, while the net profitability margins ranged between, 3.80-5.5 percent during the same period.

Acuite believes that revenue of the company is likely to improve further in the medium term on account of profitable product mix and healthy demand for the company products.

Moderate financial risk profile
The financial risk profile of LPL is moderate marked by moderate net-worth, moderate gearing and average debt protection metrics. The net-worth stood at RS.155.44Cr as on March 31, 2022 against Rs.119.97Cr during previous year. The improvement is on account of accretion of net profit to reserves. The gearing level (debt-equity) stood at 1.40 times as on 31 March, 2022 as against 1.21 times as on 31 March, 2021. The total debt as on March 31, 2022 increased to Rs.217.53 Cr from Rs.145.23 Cr in the previous year. TOL/TNW (Total outside liabilities/Total net worth) stood at 3.27 times as on 31 March, 2022 against 2.55 times in previous year. With planned increase in long term and short term borrowing, the overall gearing is expected to deteriorated marginally in FY23.

The company is currently undertaking a capex of Rs. 75 Cr to increase its production capacity to 132000 kgs/pa by end of FY23. The project is funded by debt of Rs. 54.45 Cr and balance by internal accruals. Further, the fund based banking limits have increased from Rs.84 Cr in January, 2022 to Rs. 152 Cr in the December, 2022.

The debt protection metrics which improved marginally in FY22 is expected to moderate in the near term in view of the above planned increase in debt levels. The Interest coverage ratio and debt service coverage ratio stood at 4.30 times and 2.33 times respectively in FY22 against 3.59 times and 2.03 times respectively in FY21.  The Debt to EBITDA stood at 2.60 times for FY22 as against 2.37 times for FY21. The Debt to EBITDA levels is expected to remain upwards of 3.6 times over the near to medium term.

Acuite believes LPL ability to maintain its financial risk profile over the near to medium term will remain a key rating monitorable.

Working capital intensive nature of operations:
LPL’s operations are working capital intensive marked by increasing gross current assets (GCA) days. The GCA days rose to 228 days as on March 31,2022 as against 210 days as on March 31, 2021 and 185 days as on March 31, 2021.
The GCA days are driven by inventory and debtor days. Inventory days stood at 134 days as on March 31, 2022 as against 110 days as on March 31,2021 and 122 days as on March 31, 2020. The debtor days ranged between 65-80 days during the same period. The creditor days ranged between 128-155 days for the three years ended FY2022 while the bank limit utilisation continued to remain high. The fund based banking limits have increased from Rs.84 Cr in January, 2022 to Rs. 152 Cr in the December, 2022 with average utilisation ranging between 80-96 percent during this period.
Acuite believes that further elongation in working capital cycle will be a key monitorable aspect.

Competitive and fragmented industry
The pharmaceutical formulations and chemical compounds industry has a large number of players which makes this industry highly fragmented and intensely competitive. LPL is also a moderate sized player, thereby limiting its bargaining power and susceptibility to pricing pressure is also higher compared to well-established and larger players. However, the company's presence of over 3 decades in the industry has enabled it to partially offset competitive pressures. Further, it undertakes regular research and development to improve its product offerings. This will help the company is improving its competitive position.