By Karthikeyan Thangarajan

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

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Rating Watch

Rating Action

Fund-based working capital limits

-

-

-

INR50,000

IND AA+/RWP/IND A1+/RWP

Placed on RWP

Non-fund-based working capital limits

-

-

-

INR14,940

IND A1+/RWP

Placed on RWP

KEY RATING DRIVERS

Large Debt-Funded Acquisition: The RWP follows APL’s 6 September 2018 announcement that it has entered into a definitive agreement to acquire Sandoz Inc., USA’s dermatology and oral solids businesses. As part of this transaction, APL proposes to acquire commercial operations and Sandoz’s three manufacturing facilities in the US. The company will pay an upfront purchase price of USD900 million in cash towards this transaction, which is likely to be funded with debt during CY19. APL expects to complete the transaction during 2019, subject to the receipt of approvals from regulatory authorities. 

Net Leverage to Increase; EBITDA Accretive:
With the proposed transaction, APL’s net debt is likely to more than double in FY20 (1QFY19: INR39.1 billion; FY18: INR35.1 billion). While this could increase its FFO net adjusted leverage to over 1.25x (FY18: 1.2x; FY17: 1.1x), Ind-Ra derives comfort from the EBITDA accretive nature of the transaction. According to the management, the portfolio to be acquired is likely to have margins similar to APL’s consolidated EBITDA margins of around 20%. Hence, Ind-Ra expects the leverage to gradually moderate from FY21. 

US Franchise to Benefit
: The transaction would substantially strengthen APL’s largest business segment in the near-term. In FY18, APL derived about 45% of its top line and a majority of its EBITDA from the US generic drug market. Along with the scale of operations, the company’s market position is also likely to improve. The management expects APL to emerge as the second-largest generic drug maker in the US by the number of prescriptions with this transaction. Dermatology is a focus area for APL and the company has recently commenced filing abbreviated new drug applications in this therapeutic segment. The transaction is likely to enhance the company’s offerings in this segment.

Business Profile Strengthening:
Given the early stages of the transaction, its potential impact on various aspects of APL’s business risk profile is uncertain. Ind-Ra will review any improvement in APL’s business risk profile in terms of product/ manufacturing footprint diversification, product pipeline deepening, proportion of revenue from differentiated generics and potential for synergy benefits while resolving the RWP. Ind-Ra attaches higher importance to APL’s business risk profile strengthening as the agency believes a stronger profile will render the deleveraging trajectory more resilient.


RATING SENSITIVITIES

Ind-Ra will evaluate the impact of the proposed acquisition on the business and credit profile of APL and resolve the RWP within the next six months as the execution of the transaction progresses. RWP indicates that rating may be upgraded or affirmed.


COMPANY PROFILE

APL, headquartered in Hyderabad, is a vertically-integrated pharmaceutical formulations manufacturer. It has 15 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

FY18

FY17

Net sales (INR billion)

165.0

150.9

Operating EBITDA (INR billion)

37.7

34.3

Operating EBITDA margins (%)

22.9

22.8

Operating EBITDA/finance cost (x)

48.5

51.5

Net adjusted debt/operating EBITDA (x)

0.9

0.8

Source: APL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

8 May 2018

12 May 2017

4 October 2016

Issuer rating

Long-term

-

IND AA+/RWP

IND AA+/Positive

IND AA+/Positive

IND AA+/Stable

Fund-based working capital limits

Long-term/Short-term

INR50,000

IND AA+/RWP/IND A1+/RWP

IND AA+/Positive/IND A1+

IND AA+/Positive/IND A1+

IND AA+/Stable/IND A1+

Non-fund-based working capital limits

Short-term

INR14,940

IND A1+/RWP

IND A1+

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121