The credit rating of Vita Line LLC (hereinafter, Vita Line, or the Company) is based on the high market risk of the wholesale trade sector stemming from the fact that the Company is the main supplier in the non-formalized Vita Group (hereinafter, the Group) on the one hand, and the strong assessment of the business profile, very low leverage and very high interest payment coverage on the other hand. The rating is constrained by the size of the Company and its low corporate governance assessment.
Vita Line is the supplier in an informal group of one of the leading pharmacy chains in Russia (according to different analytical agencies, the Group is among the top four (RNC Pharma), top eight (Vademecum) or top ten (DSM Group) chains). The Group sells its goods through pharmacies under the Vita Express and Vita Tsentralnaya brands. As of the end of 2020, the Group’s chain consisted of 1,814 pharmacies. The chain is geographically diversified in the Central European part of Russia, the main share of pharmacies (over 50%) is located in the Volga Federal District. The Company’s revenues in 2020 amounted to RUB 38 bln. (+9.47% compared to 2019). The main shareholders of the Company are I. P. Yankov, Y. I. Yankov, and T. A. Karpacheva.
Key rating assessment factors
The strong business profile assessment takes into account the low cyclicality and elasticity of demand in the Company’s key sales market — medical drugs. ACRA also notes the high quality of the Company’s counterparties, which is primarily due to the sale of products via the companies of the Group, while the majority of the Company’s suppliers are well-known global pharmaceutical companies. The sale of goods to the companies of the Group also earns a high assessment for the settlement structure due to the Company’s ability to de-facto control the structure of sales settlement.
Very low leverage and very high coverage. The Agency notes the Company’s very conservative financial policy in terms of leverage: as of June 31, 2021, the Company’s debt comprised of long-term bond issues totaling RUB 3.35 bln. According to ACRA’s calculations, as of December 31, 2020, long-term debt to FFO before fixed payments was 0.8x, while coverage (FFO before net interest payments to interest payments) was 8.9x. ACRA does not expect significant growth of debt indicators or decline in coverage indicators in 2021.
The high liquidity assessment is based on the structure of the Company’s debt, which does not feature any peak repayments in 2021, and the availability of undrawn credit limits worth RUB 2.8 bln. Most of the current limits are valid until the end of 2021, however, the Company has announced that it intends to work on increasing the size of available limits and prolonging the current ones, which means that an improvement in the Company’s liquidity position can be expected in the future.
High profitability and cash flow assessments. The Company demonstrates a high FFO margin before interest payments and taxes (10.1% in 2020), including due to well-established logistics and the presence of its own warehouse facilities. The high cash flow assessment stems from the high FCF margin, which according to ACRA’s calculations, amounted to 7.3% in 2020. It is noteworthy that the Company makes minimal capital expenses on opening new pharmacies and does not pay dividends, which enables it to maintain high FCF margin.
The small size of the Company compared to other wholesale trade players is due to the FFO before net interest payments and taxes, which, according to ACRA’s calculations, amounted to RUB 3,843 mln in 2020. However, it should be noted that the Company is a successful player in the pharmaceuticals market and one of the 15 largest distributors. The Company’s revenues and FFO before net interest payments and taxes directly depend on the development of sales and the expansion of the Group’s chain. The Group temporarily stopped actively opening new pharmacies in 2020 amid the spread of the COVID-19 pandemic, however it plans to resume broadening its network in the second half of 2021.
Low corporate governance assessment. ACRA notes the absence of key management bodies, such as a board of directors, as well as the related committees, and policies and formalized procedures for making management decisions, which limits the Company’s rating. At the same time, the Agency takes into account the fact that the presence of all attributes and compliance with high standards of corporate governance is not always advisable for companies at this stage of development. ACRA neutrally assesses the Company’s development strategy in connection with the consistent development of its activities, and notes the rapid and successful expansion of the chain of pharmacies in 2018. The “group structure” sub-factor is assessed as average due to the assignment of a rating to the Company, which is a separate legal entity within the Group, but key activities are carried out with affiliated legal entities. The Agency notes the low financial transparency assessment, which above all is related to the lack of consolidated IFRS reporting at group level. Nevertheless, the Agency analyzed the combined IFRS financial statements of the Group for 2020. Risk management is assessed as average. The Company has certain procedures to reduce financial and reputational risks when working with counterparties.
- Implementation of the Group’s plans to broaden its chain of pharmacies in 2021–2023;
- Maintaining the current level of profitability;
- Inflation for the basket of medicines at no less than 5%;
- No major annual dividend payments over the forecast horizon.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Significant improvement of corporate governance practices;
- Improved position in the Russian pharmacy chain market;
- Formalization and consolidation of the Group on the basis of the Company.
A negative rating action may be prompted by:
- Weighted ratio of long-term debt to FFO before fixed payments exceeding 1x;
- Weighted ratio of FFO before net interest payments falling below 8x;
- Deterioration of the Company’s liquidity position and weighted FCF margin falling below 5%;
- Significant deterioration of the Group’s FFO margin before fixed payments coupled with deterioration of the structure of the Group’s balance sheet under IFRS.
Support: ACRA assessed the combined reporting of the Group and decided to not apply adjustments to the SCA.
No outstanding issues have been rated.
The credit rating has been assigned on the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to Vita Line LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Vita Line LLC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the RAS financial statements of Vita Line LLC. The credit rating is solicited, and Vita Line LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Vita Line LLC. No conflicts of interest were discovered in the course of credit rating assignment.