By Karthikeyan Thangarajan

India Ratings and Research (Ind-Ra) has affirmed Aurobindo Pharma Ltd’s (APL) Long-Term Issuer Rating at ‘IND AA+’. The Outlook is Positive. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limits

-

-

-

INR50,000 (increased from INR42,050)

IND AA+/Positive/IND A1+

Affirmed

Non-fund-based working capital limits

-

-

-

INR14,940 (reduced from INR22,890)

IND A1+

Affirmed

Commercial paper programme

-

-

-

INR5,000

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

KEY RATING DRIVERS

Structural Shift in EBITDA Profile: The rating action reflects a steady and sustained improvement in APL’s operating EBITDA margins to 24% in 9MFY18 (FY17: 22.8%, FY16: 23.1%) and Ind-Ra’s expectation of this to continue over FY19-FY20. The company has steadily shifted production of generic drugs for its European business (portfolio acquired from Actavis Plc; now contributes about 25% to the top line) to its Indian manufacturing facilities, thus aiding in improvement in the segment’s EBITDA margins to a low double-digit in 9MFY18, as against EBITDA losses reported in FY16. With stabilisation of production at its Unit XV, which is dedicated to the European franchise, the agency expects the improvement in the margins to sustain over the medium term. Moreover, with the completion of Generis Farmaceutica S.A.’s acquisition in April 2017, European formulations contributed 27% to the overall top line in 9MFY18 with double-digit operating EBITDA margins. This has substantially eased APL’s reliance on the US generic market for EBITDA generation and reflects improving diversification of cash flows.

Robust Cash Flow Generation, Credit Metrics:
The affirmation reflects sustained strong fund flow from operations (FFO; operating cash flow before working capital changes less cash interest and cash tax) margins and a steady decline in debt. FFO margins stood at 17.6% in FY17 (FY16: 17.5%). Strong cash flow from operations generation during FY18 is likely to have resulted in a positive free cash flow, despite large capex of INR8.5 billion for 9MFY18. Ind-Ra expects free cash flow to remain positive over FY19-FY20 owing to strong operating profitability and stable working capital cycle. Hence, the company’s net debt levels are likely to moderate further (9MFY18: INR34.5 billion, FY17: INR28.8billion). FFO net leverage (net adjusted debt/FFO) stood at 1.1x in FY17 (FY16: 1.8x). During 9MFY18, net adjusted leverage (net adjusted debt/operating EBITDA) was almost stable at 0.9x (FY17: 0.8x), while EBITDA interest coverage (operating EBITDA/finance cost) improved to 56.3x (51.5x) owing to lower cost of debt.

Strong Business Risk Profile:
APL has large scale of operations, which are diversified across geographies, production facilities and dosage forms. Acquisitions, along with new product launches caused revenue to grow at a CAGR of 27% to INR150.9 billion during FY13-FY17 (FY17: INR150.9 billion, FY16: INR139.0 billion). The top two geographies contributed 45% and 27% to the total revenue of INR124 billion in 9MFY18. Timely capacity additions, focussed on regulated markets, have led to a steady moderation of product concentration at manufacturing facility levels. This has also moderated revenue risk in case of any potential regulatory actions. The company is backward integrated for about 70% of its formulation revenue, which enables it to achieve supply diversification. The growing share of revenue from difficult-to-manufacture dosage forms such as injectables is likely to moderate the vulnerability to price erosion risks.

Challenging US Generic Market Conditions:
In line with its global peers, APL experienced 8%-10% pricing erosion in its base oral solid portfolio in the US generic market in 9MFY18.  Despite this, the company’s US formulation sales grew 10% yoy to INR57 billion, primarily driven by the launch of 31 new products in the US in 9MFY18 (FY17: 35). The drag of double-digit pricing erosion on this segment’s profitability was nearly compensated by increasing proportion of revenue from high margin injectable business. APL launched five new injectables in the US during 9MFY18. It had a robust abbreviated new drug approval pipeline of 114 at end-December 2017, of which 33 are injectables. During FY18, the company received approval for its first penem injectable. It had eight penem, oncology and hormone injectables pending approvals at end-December 2017. Ind-Ra expects the proportion of the US revenue from injectable to ramp-up over FY19 (9MFY18: 15%). APL’s ability to launch differentiated generic products in the US, which will aid in rendering its revenue stream more defensible to pricing pressure, will be critical in sustaining the strong business risk profile.

Near-Term M&As to Remain High:
Ind-Ra expects APL’s organic top line growth to slow down over FY18-FY21, partly due to pricing pressure in its key markets. A sizeable proportion of the revenue growth over FY13-FY17 was driven by acquisitions. Likely monetisation of the company’s key organic revenue boosters such as hormones, oncology injections, specialty injections and biosimilars is still a couple of years away. According to the company’s publicly stated strategy, it is actively pursuing acquisition opportunities to strengthen its franchise in Europe and/or other growth markets. Ind-Ra has factored in USD500 million debt-funded EBITDA neutral acquisitions over FY19-FY20 while arriving at the ratings. Total acquisition outflow remained below USD400 million over FY13-FY18 and a majority of the transactions were EBITDA accretive. Management’s willingness to add meaningful leverage to the balance sheet for mergers and acquisitions (M&As) is likely to weigh on the ratings in the short-term. Ind-Ra will assess the impact of the M&As on a case-to-case basis and review the ratings accordingly. 

Exposure to Regulatory Actions:
  APL remains exposed to regulatory risks as it derives nearly 70% of its revenue from regulated markets. During 4QFY18, the company received few Form 483 observations on one of its injectable formulations facilities in Hyderabad from the US Food and Drug Administration. Ind-Ra understands that these observations are not deemed to be serious and have not affected production at this facility. However, any adverse impact on EBITDA generation due to regulatory actions can result in a sustained increase in leverage and be negative for the ratings.


RATING SENSITIVITIES

Positive: Ability to improve operating EBITDA margins leading to FFO net adjusted leverage sustaining below 1.25x while maintaining strong business risk profile could lead to rating upgrade.

Negative:
Adverse regulatory actions leading to revenue volatility and adverse impact on profitability and cash generation and/or higher than expected debt-funded acquisitions resulting in FFO net adjusted leverage increasing above 1.25x on a sustained basis could result in the Outlook being revised to Stable.


COMPANY PROFILE

APL, headquartered in Hyderabad, is a vertically-integrated pharmaceutical formulations manufacturer. It has 14 formulation manufacturing facilities (three in the US, one in Brazil and one in Portugal) and 11 active pharmaceutical ingredients manufacturing facilities. The facilities have regulatory approvals from major international agencies. 

FINANCIAL SUMMARY

Particulars

FY17

FY16

Net sales (INR billion)

150.9

139.0

Operating EBITDA (INR billion)

34.3

32.1

Operating EBITDA margins (%)

22.8

23.1

Operating EBITDA/finance cost

51.5

12.5

Net adjusted debt/operating EBITDA

0.8

1.3

Source: APL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

12 May 2017

4 October 2016

8 March 2016

Issuer rating

Long-term

-

IND AA+/Positive

IND AA+/Positive

IND AA+/Stable

IND AA+/Stable

Fund-based working capital limits

Long-term/Short-term

INR50,000

IND AA+/Positive/IND A1+

IND AA+/Positive/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Non-fund-based working capital limits

Short-term

INR14,940

IND A1+

IND A1+

IND A1+

IND A1+

Commercial paper programme

Short-term

INR5,000

WD

IND A1+

IND A1+

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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

Analyst Names

  • Primary Analyst

    Karthikeyan Thangarajan

    Senior Analyst
    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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121