By Karthikeyan Thangarajan

India Ratings and Research (Ind-Ra) has upgraded Aurobindo Pharma Ltd’s (APL) Long-Term Issuer Rating to ‘IND AA+’ from ‘IND AA’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Improvement in Profitability: The upgrade reflects the improvement in APL’s operating profitability during 9MFY16 to 22.9% (FY15: 21.2%) due to new product launches. During this period, the company received 35 new abbreviated new drug application (ANDA) approvals (FY15: two; FY14: 10) from the US Food and Drug Administration out of which about 20 products have already been commercialised. However, the company’s ability to sustain the improvements in profitability is exposed to intense competition from other generic players in the regulated market. APL is still in early stages of shifting the production for its European Union (EU) businesses to India. Ind-Ra believes that a sustained improvement in the operating profitability will happen only after a substantial portion of manufacturing for EU business is shifted to India.

Net Leverage to Improve Gradually: Ind-Ra expects the company’s debt levels to decline gradually over FY17-FY18 and result in a further improvement in net adjusted leverage (net adjusted debt/ operating EBITDA). Net leverage improved during 9MFY16 to 1.3x (FY15: 1.6x) consequent to the improvement in profitability. APL’s net debt increased in FY15 to INR44.6bn (FY14: INR37.8bn) following debt-funded acquisition of Natrol Inc. The company is implementing INR26bn capex over FY16-FY17. Despite the large ongoing capex, its free cash flow remained positive during 9MFY16 and resulted in a reduction of the net debt to INR40.3bn at end-December 2015. APL’s free cash flows are likely to remain positive and aid in deleveraging.

Robust Business Profile: The ratings factor in APL’s robust business risk profile as reflected in its geographically diversified revenue stream, strong product pipeline and high degree of backward integration. During 9MFY16, the company filed 11 ANDAs taking the total filings to 387 of which 228 have been approved. Recent acquisitions have enabled the company to increase the share of revenue from regulated markets to 65% in FY15 from 33% in FY12. Ind-Ra believes that strong product pipeline, manufacturing facilities with regulatory approvals and a sustained focus on research will enable the company to continuously launch new products in the regulated market and strengthen its position. 

R
egulatory Concerns: APL is exposed to regulatory risks as it derives more than 65% of its income from regulated markets. Diversification of product approvals across manufacturing units mitigates this risk to some extent.


RATING SENSITIVITIES

Positive: A sustained improvement in the profitability due to the launch of new products and/ or shifting of manufacturing for the EU businesses to India resulting in the net adjusted leverage being sustained below 1x could be positive for the ratings. 

Negative: An increase in the debt levels due to unplanned debt-funded capex and/or acquisition leading to the net adjusted leverage being sustained above 1.5x would be negative for the ratings.


COMPANY PROFILE

APL, headquartered at Hyderabad, is a vertically integrated pharmaceutical formulations manufacturer. At end-December 2015, APL’s product portfolio consisted of 228 USFDA-approved finished dosage form products, around 550 products approved in Europe and South Africa and a strong pipeline of products in multiple therapeutic segments. The company has 21 manufacturing facilities spread across India (17), US (three) and Brazil (one).

APL’s ratings:
- Long-Term Issuer Rating: upgraded to ‘IND AA+’ from ‘IND AA’; Outlook Stable
- INR39,340m fund-based working capital limits (reduced from INR48,000m): upgraded to ‘IND AA+’/Stable from ‘IND AA’ and affirmed at ‘IND A1+’
- INR25,600m non-fund based working capital limits (increased from INR16,000m): affirmed at ‘IND A1+’




SOLICITATION DISCLOSURES

Additional information is available on 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

Analyst Names

  • Primary Analyst

    Karthikeyan Thangarajan

    Associate Director
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401712

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121