S&P revises Glenmark outlook to 'negative' on weak operating performance

Standard and Poor's (S&P) has revised the outlook for pharma major Glenmark to 'negative' on weaker-than-expected operating performance and refinancing risk for notes that mature in 2021.

"Glenmark's weaker-than-expected operating performance and elevated capital spending will result in low financial headroom over the next 12 months", rating agency S&P said in a statement on Wednesday. The drugmaker's rating has been affirmed at 'BB-'.

"The India-based generic drugmaker's free operating cash flow generation will be insignificant, despite lower capital spending guidance by the company's management and our modest growth assumptions", S&P added.

"The company's revenue growth in fiscal 2019 (the year ended March 31, 2019) was in line with our expectation of 8 per cent-10 per cent, but its EBITDA margins slipped to 16.7 per cent, compared with our estimates of 18 per cent-20 per cent. This resulted in a ratio of funds from operations (FFO) to debt of 19.9 per cent, just below our downgrade trigger of 20 per cent," said the rating agency.

"Glenmark's operating performance for the first quarter of fiscal 2020 remains weak, with profit slipping further by about 90 basis points, compared with fiscal 2019," rating agency said.

Glenmark's revenue growth of 7.3 per cent was also slightly below our 8 per cent-10 per cent estimate for fiscal 2020. This was attributable to the absence of major product launches, subdued sales for its generic Mupirocin cream, continued pressure on dermatology products in the US. The volatile performance of Latin American markets also impacted performance.

The company's operations may not be able to deleverage meaningfully over the next 12 months, S&P added.

Glenmark is expected to generate less than Rs 200 crore of free operating cash flow (FOCF) in FY20, compared to a negative FOCF of Rs 260 crore in FY19. The improvement is largely due to management's lower capital expenditure (capex) guidance of Rs 800 crore, compared to Rs 1,220 crore spent in FY19. 

Glenmark's capex for the first quarter of fiscal 2020 was Rs 190 crore, which was in line with its guidance.