Within a year of raising high-cost debt from Goldman Sachs, India’s largest online pharmacy platform PharmEasy has breached its loan covenant terms after failing to raise equity, people aware of the development said.

As per the terms, the company was supposed to raise equity of around Rs 1,000 crore, or about $120 million, linked to its burn rate velocity. It has failed to do that after trying for a year and postponing its initial public offering (IPO).

However, PharmEasy has not defaulted on any of its payment obligations so far.

Loan covenants are a series of small, independent agreements made between a debtor (borrower) and a creditor (lender). Loan covenants expressly outline behaviours that a borrower must – or must not – engage in. When a borrower violates one of these loan covenants (often called a covenant breach), it is considered an event of technical default.

The terms of the covenant agreement allow the US investment bank to potentially take over the entire company or its most profitable arm Thyrocare on account of the breach as all the assets of PharmEasy’s parent API Holdings have been used as security for the loan.

Negotiations are currently going on to either restructure the debt or raise equity from existing or new investors and cure the violation, people cited above said.But people close to the unicorn argue that with the burn rate significantly reducing and business poised to turn around, PharmEasy should actually raise less equity than what was originally planned and avoid dilution.PharmEasy had borrowed Rs 2,280 crore, or $285 million, from Goldman Sachs in August last year to pay off an earlier debt it had incurred from Kotak Mahindra Bank to buy Thyrocare. It was a 5-year loan attracting 17-18% annual interest rate.

The company hoped to pay off Rs 2,000 crore of its debt from the proposed IPO proceeds of Rs 6,250 crore. However, with IPO plans of API Holdings pushed by at least two years to 2025, and a pre-IPO down round to raise $250-$300 million also failing last year, a capital raise may not be that straight forward.

The company continues to service its high cost debt, having paid back only $50 million.

As per an ET article dated February 14, PharmEasy’s debt service obligation is Rs 30 crore per quarter. Part of the Goldman facility – around Rs 800-820 crore ($100 million) – was in the form of a convertible equity instrument, while the rest was debt.

There has been speculation that financial woes would force PharmEasy to sell the listed Thyrocare, maybe even back to its original founder A Velumani from whom they purchased a controlling 66% stake in the diagnostic chain for Rs 4,546 crore in June 2021. The company has always vehemently denied any such possibility.

Goldman Sachs declined to comment.

Mails sent to PharmEasy spokesperson and Siddharth Shah, cofounder and CEO of API Holdings did not generate a comment until press time Wednesday.

The valuation of the company – which had grown through an M&A blitz in recent years – has dropped drastically. Between December and February, investors Neuberger Berman and Janus Hendersen have marked down PharmEasy’s valuation by half to $2.8 billion from the earlier $5.6 billion. Losses grew four times in FY22 even as revenues grew 2.5 times.

Path to profitability

The company management, however, has gone on record to say PharmEasy is trying to bring down its cash burn. Its revenue from operations grew to Rs 5,729 crore for the fiscal year ended March 2022 from Rs 2,235 crore in FY21, according to its annual financial statements with the Registrar of Companies (RoC). Annual losses were Rs 2,731 crore in FY22 against Rs 641 crore in FY21 while its cash outflows from operations also surged 3.2 times to Rs 2,589 crore in FY22. Ebitda (earnings before interests, taxes, depreciation, and amortisation) margin and ROCE (return on capital employed), too, remained depressed in FY22.

However, people close to the company said its cash burn has come down significantly.

From a negative Ebitda of Rs 80 crore last March, this April the operations became Rs 14 crore Ebitda positive.

“The company has grown rapidly with 4-5 back-to-back acquisitions. They are finally getting rationalised,” an investor said on condition of anonymity.

An official who did not wish to be identified said, “When the Goldman loan was taken to refinance the Thyrocare acquisition debt, the capital requirement was much higher because the company was burning significant cash. That is not the case now and, therefore, there is a need to renegotiate the covenant terms. There is no need to raise $120 million.”

Another official said there is value in the company. Just the B2B (business-to-business) vertical will throw up Rs 100 crore Ebitda. The business is seeing 20-22% growth year on year, the person added.

Even at a significant discount of almost half of its October 2021 valuation of $5.4 billion, investors liked General Atlantic, Canadian fund CPP Investments, and Abu Dhabi’s state fund ADIA baulked at the prospect of backing PharmEasy in 2022 when Morgan Stanley and Bank of America were mandated to help it raise funds.

The company did raise Rs 650 crore through a rights issue from existing investors Prosus Ventures, Temasek, TPG Growth and others last year.

TPG Growth declined to comment. Prosus and Temasek representatives were unavailable for comment.