By Karthikeyan Thangarajan

India Ratings and Research (Ind-Ra) has assigned Aurobindo Pharma Ltd's (APL) INR5,000m commercial paper (CP) programme a short-term ‘IND A1+’ rating. A list of outstanding ratings is at the end of this commentary.

The CP will be used to fund working capital requirements. The CP will be carved out of the existing fund-based working capital limits.

KEY RATING DRIVERS

Improvement in Profitability: The ratings reflect the improvement in APL’s operating profitability during FY16 to 23.1% (FY15: 21.2%) due to new product launches. During this period, the company received 49 new abbreviated new drug application final approvals and nine tentative approvals (FY15: one final and one tentative approvals; FY14: 10 final approvals) from the US Food and Drug Administration, out of which about 28 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 FY16 to 1.3x (FY15: 1.6x) consequent to the improvement in profitability. The company is implementing around INR26bn capex over FY16-FY17. Despite the large ongoing capex, its free cash flow remained positive during FY16. 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 FY16, the company filed 22 abbreviated new drug applications, taking the total filings to 398 of which 251 have been approved (215 final approvals and 36 tentative approvals). Recent acquisitions have enabled the company to increase the share of revenue from regulated markets to 66% in FY16 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. 

Regulatory 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 in Hyderabad, is a vertically integrated pharmaceutical formulations manufacturer. At end-FY16, APL’s product portfolio consisted of 251 USFDA-approved finished dosage form products, around 233 products approved in Europe and South Africa and a strong pipeline of products in multiple therapeutic segments. 

APL’s outstanding ratings: 
- Long-Term Issuer Rating: ‘IND AA+’/Stable
- INR39,340m fund-based working capital limits: ‘IND AA+’/Stable/ ‘IND A1+’
- INR25,600m non-fund based working capital limits: ‘IND A1+’
- INR5,000m CP programme* : ‘IND A1+’
*this facility is carved out of existing working capital facilities.



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