India Ratings has affirmed Aurobindo Pharma (APL) Long-Term Issuer rating at ‘AA-'. The outlook is stable. The affirmation reflects India Ratings’ opinion that APL’s revenue visibility over the medium term remains strong driven by new product launches, mainly in the US. This, along with better fixed cost absorption from higher plant capacity use, is likely to lead to an improvement in EBITDA margins from FY13 (year ending March). As a result, financial leverage (adjusted debt net of cash/EBITDA) is likely to see a sustained improvement over the medium term.
Financial leverage deteriorated to 5.0x in FY12 from 2.3x in FY11 due to an increase in debt to Rs 30 billion from Rs 24 billion and a decline in EBITDA margin to 12.4% from 24.9%. The increase in debt was partly due to restatement of foreign currency debt (Rs 3.5 billion). Also, the company reported muted revenue growth of 10.5% yoy in FY12. This is because during FY11 USFDA had sanctioned APL’s Unit 3 and Unit 6 which negatively impacted APL’s export sales to the US during FY12 and also affected the off-take by Pfizer for the US market. The decline in margins is attributed to lower dossier income, one-time incremental expenses and lower absorption of fixed costs on the affected plants.
The increase in APL's revenue and profitability coupled with limited capex is likely to translate into positive free cash flows and a decline in total adjusted debt over the medium-to-long term. Minimal scheduled debt repayments, along with stable working capital, are likely to keep liquidity comfortable over the short term.
APL expects USFDA to lift all sanctions and also to approve its new Unit 4 during H2FY12. Commencement of exports from Unit 6 and Unit 4 will support revenue growth. To manage revenue growth, APL has set up a distribution network in the US through which it sells majority of its generic formulations. As on end-June 2012, APL’s product portfolio consisted of 152 USFDA approved finished dosage forms (FDFs) and another close to 200 products approved in Europe and South Africa and a long pipeline of products in multiple therapeutic segments.