Wockhardt Ltd — Capital/Financing Update 2018

Oct 12, 2018

12th October, 2018

Corporate Relations Department Exchange Plaza Mumbai - 400 001 Mumbai - 400 051

BSE Limited National Stock Exchange of India Limited P J Towers, Dalai Street, Bandra Kurla Complex, Bandra (E),

Scrip Code: 532300 NSE Symbol: WOCKPHARMA

Dear Sirs,

We have to inform you that India Ratings and Research Private Limited ("India Ratings") has revised the Company's ratings for short-term Bank facilities/ Commercial Paper to "IND A3+" from "IND A1" and for long-term loan facilities rating to "IND BBB/ outlook: Negative" from "IND N Outlook: Negative".

Further to inform you that India Ratings have revised the rating of the Company owing to on-going remediation costs being incurred, high R&D expenses, regulatory overhang etc. The detailed Press Release of India Ratings is also enclosed for reference.

Kindly take the above information on record.

Thanking you

for Wockhardt Limited

Narendra Singh Company Secretary

Enel: As Above

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10/12/2018 India Ratings and Research Private Limited : India's Most Respected Credit Rating and Research Agency : India Ratings Downgra.

IndiaRarings &: Research A Filch vricup Cosfljwny

India Ratings Downgrades Wockhardt to 'IND BBB'; Outlook Negative

12

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By Anhl! Hfreinfrra

India Ratings and Research (Ind-Ra) has downgraded Wockhardt Limited's Long-Term Issuer Rating to 'IND BBB' from 'IND A', The Outlook is Negative, The instrument-wise rating actions are as follows:

Instrum e nt Type	D ate ofIssuance	CouponR ate	M atu rity Date	S ize o f Issue(m illion)	R ating /O utlo ok	R atingA ction
Fund-based limits				INR4,000	IND BBB/Negative	Downgraded
Non-fund-based limits	•	-		INR3,588.0	IND A3+	Downgraded
Fund-based/ non-fund-basedinterchangeable limits	•	-*•		1NR1,663	IND BBB/Negative/IND A3+	Downgraded
Term loans			December 2021 -January 2022	USD 380	IND BBB/Negative	Downgraded
sTerm loans	r?	-	June 2022-Qctober2022	INR4,7S0 0	IND BBB/Negative	Downgraded
Commercial paper/short-term debtprogrammes*			90-180 days	]NR2,000	IND A3+	Downgraded
Proposed working capital facilities				1NR5,087,5	Provisional INDBBB/Negative/Provisional IND A3+	Downgraded

' The CP will be carved out of fund based working capital limits.

KEY RATING DRIVERS

W eakened C red it Pro file : Tlie downgrade reflects the lower-than-expected improvement in Wockhardt's operational performance and further weakening of its credit profile in FY18- 1QFY19, In FY18, Wockhardt reported muted revenue of INR39.4 billion (FY17: INR 40.1 billion) attributed to Goods and Services Tax-related transitional channel disturbances in India and challenging generic pricing environment in the US markets, The EBITDA losses of INR554 million in FY1B (FY17 EBITDA profit: 1NR262 million; FY16 EBITDA profit: 1NR5,09S million) were attributed to the on-going remediation costs being incurred by the company in relation to the US focused facilities under import alerts and warning letters, high R&D expenses for abbreviated new drug application (ANDA) Filings and differentiated products, and high-cost US base. Net adjusted leverage (net adjusted debt/operaling EBITDA) turned negative in FY18 (FY17: 90.86x; FY16: 2,42x) as well as negative interest coverage (0.13x; 5.77x). While Wockhardt's operating EBITDA improved in 1QFY19 to 1NR287.4 million (1QFY18: loss of INR793.4 million), the interest coverage continued to be below l.Ox

H igh R efinancing Risk to Persist: The Negative Outlook reflects Wockhardl's continued delays in shoring-up liquidity and/or debt refinancing, owing to challenging market conditions, which have elevated refinancing risks for FY19-FY20, Weak free cash flow for two consecutive years (FY18: 1NR1.0B billion; FY17: negative) has significantly depleted cash balances (FY10: INR12.2 billion; FY17: INR17.8 billion) and liquid investments (INR0.24 million; FY17: INR3.32 billion). The management is evaluating refinancing options for the large upcoming debt repayments (FY19: INR11.4 billion; FY20: INR7.4 billion) through an international bond or a qualified inslilutional placement/ term loans in India. While the efforts are under advanced stages of discussion, adverse market conditions and refinancing structure are likely to determine the timeline and cost of refinancing. Also, sustained mitigation of refinancing risk critically depends on an operational turnaround in FY20.

W eakened B u siness Profile ; In d ia and ROW B usinesses O ffer S upp ort: Ind-Ra believes Wockhardt's business risk profile is no longer commensurate with the 'IND A' rating level, given the steady decline in top line and continued weakness in EBITDA generation However, Wockhardt's sizeable scale and modest compelitive position in the domestic markets (FY18: INR15.1 billion; FY17: INR15.2 billion) and ROW markets (INR4.37 billion; INR3.G9 billion), which are EBITDA positive with mid- to high-teen EBITDA margins, support its business risk profile, Wockhardt continues to focus on new product launches in various therapies in the domestic markets and is also increasing its presence in the ROW markets to strengthen profitability, Management's ability to reduce regulatory concerns in regulaled geographies, improve profitability and monetise new products will remain the key sensitivities for a recovery in the business risk profile.

sig n ific a n t R eg u latory O verhang: Seven of Wockhardt's facilities were under regulatory restrictions by U5FDA at end-march 2018, One of its two flagship formulation facilities in Waluj and one In Chikallhana (both in Aurangabad) continue to be under import alerts since 2013, The other facility in Waluj received a warning letter in 2013. Also, the facilities under the subsidiaries CP Pharmaceuticals (UK) and Morton Grove Pharmaceuticals, Inc (US) were issued warning letters in FY17. Morton Grove Pharmaceuticals and the facilities in Waluj contribute around 80% to the sales to US markets An escalation to an import alert for them would affect overall operations and delay recovery.

O perational Turnaround FY20 onw ards: Since FY14, Wockhardt has implemented a remediation plan for the manufacturing facilities under the regulatory restriction. The company has been shifting a few of the high value ANDAs to third-party manufacturers. It has received eight approvals from USFDA and launched two high-value products over 2HFY17-FY18, This has supported improvement in gross margins (1QFY19: 57.5%; 2HFY1B: 54.9%; 1HFY18: 53.8%), The management expects to launch four more products in FY19. Wockhardt has 70 ANDAs (at end-March 2018) awaiting approval from USFDA, which upon commercialisation may support modest growth in its US revenues amid competition,

Wockhardt's management has taken several cost-saving initiatives at plant level while rationalising employee cost and R&D expenditure in FY18. However, the improvement in operating profitability has been marginal owing to high remediation cost (FY18: around 1NR1.5 billion) and high R&D expenses (FY18: INR2.B billion). The management expects remediation cost to moderate in FY20 coupled with stable R&D spends at FY18 levels. The agency believes that at the current run rale, the operating profitability would remain in single digits for FY19-FY20.

M onetisation o f C oncerted R & D In itia tiv e s FY21 O nw ard s: Wockhardt is developing a new class of patented breakthrough anti-infeclives for combating multi-drug anti-microbial resistance and has received qualified infectious disease product approval for five unique drugs from USFDA, Of which, three are in various advanced stages of global clinical trials and two molecules are in advanced stages of clinical trials in India. The management expects to commercialise these products FY21 onwards. However, the high R&D costs will continue to stress the company's profitability (ill then.

RATING SENSITIVITIES

Po sitive: Future developments that could collectively lead to a Stable Outlook include: - timely refinancing of the upcoming repayments and an improvement in liquidity • a significant improvement in the profitability by scaling-up US revenues, due to commercialisation of ANDAs through third parlies and/or resolution of the regulatory issues

Negative: Future developments that could, individually and collectively, lead to a rating downgrade include: - a further escalation in the regulatory actions, affecting revenues and/or profitability

• a lower-lhan-expected improvement in the operaling profitability or cash flow from operations

• further delays in shoring-up liquidity and/or debt refinancing

COMPANY PROFILE

10/12/2018

Incorporation Results and The Resistent of Phylater Indiana antibused and the State Research Property Research Property and Ratings Downgra...

FINANCIAL SUMMARY

Particulars	FY16	FY17
Revenue (INR million)	39,369.0	40,146,1
E8ITDA (INR million)	$-554.3$	262.2
EBITDA margin (%)	$-1.4$	0.7
Gross interest coverage (x)	$-0.24$	0.13
Net financial leverage (x)	$-46.93$	90,86
Total adjusted debt (INR million)	38,197.8	41,670.5
Cash & cash equivalents including liquid current investments(INR million)**	12,183.6	17,846.1
Source: Wockhardt, Ind-Ra
** excludes investments in publicly traded equity investments

RATING HISTORY

Instrument Type	Current Rating/Outlook			Historical Rating/Outlook/Rating Watch
	Rating Type	RatedLimits(million)	Current	29 March 2018	8 December2016	11 February2016
Issuer rating	Long-term	×.	IND BBB/Negalive	IND A/Negative	IND AA-/Negative	IND AA/Stable
Fund-based limits	Long-term	INR4,000	IND BBB/Negative	IND A/Negative	IND AA-/Negative	IND AA/Stable
Non-hand-based limits	Short term	INR3,588,0	$INDA3+$	IND A1	$INDA1+$	$INDA1+$
Fund-based/ non-fund-based interchangeable limits	Long-term/short term	INR1,663,0	IND BBB/Negative/IND A3+	IND A/Negative/IND A1	INDAA-/Negative/IND$A1+$	INDAA/Stable/IND$A1+$
Term loans	Long-term	USD380	IND BBB/Negative	IND A/Negative	IND AA-/Negalive	IND AA/Stable
Term loans	Long-term	INR4,750	IND BBB/Negative	IND A/Negative	IND AA-/Negative	IND AA/Stable
Commercial paper/short-term debt programme	Long-term	INR2,000	$1ND A3+$	IND A1	$INDA1+$	$INDA1+$
Proposed working capital facilities	Long-term/short term	INRS, 087.5	Provisional IND BBB/Negative/Provisional INDA3+	Provisional IND A/Negative/Provisional INDA1	÷

COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer

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Applicable Criteria

Corporate Rating Methodology

Analyst Names

Primary Analyst Ankit Bhembre

Senior Analyst

India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051 +91 22 40356197

Secondary Analyst Karthikeyan Thangarajan Associate Director +91 44 43401712

C o m m ittee C h a irp e rso n S a lil G a rg Director +91 1143567244

M edia R elatio n N a m ita S H arm a

Manager - Corporate Communication +91 22 40356121