India Ratings & Research (Ind-Ra) has upgraded Aurobindo Pharma (Aurobindo) long-term issuer rating at 'AA' from 'AA-'. The outlook is stable. The upgrade reflects a substantial and sustainable improvement in Aurobindo's leverage to below 2x in FY14 (year end March) from 4.0x in FY13.

This was a result of an increase in the company's top-line resulting from all its USFDA-approved facilities being operational. The profits also received a substantial, one-time boost during FY14-FY15 due to the six months exclusive selling rights Aurobindo received in the US for the generic version of a drug. Aurobindo's FY14 revenue increased 42.2% yoy to Rs 81 billion while EBITDA margins were 26.3% (FY13: 15.1%).

Aurobindo invested about Rs 2.2 billion to acquire the loss-making European business of Actavis Plc during FY14. It has also emerged as the highest bidder for acquiring the branded, over-the-counter, nutritional supplements business of Natrol Inc for Rs 8 billion (USD 132.5 million). This is likely to be funded primarily by fresh overseas borrowing. Over the next 30 months, Aurobindo plans to incur Rs 17 billion to increase the capacity of its existing plants and add a dozen new facilities to support its international operations. Ind-Ra believes the strong pipeline and continuous capacity augmentation is likely to support further growth.

While the acquisition and expansions are likely to substantially increase Aurobindo's top-line, the ability to sustain EBITDA margins of around 21% is likely to be the key challenge in keeping the leverage below 2x levels for the next two years.

The ratings continue to factor in the weak rupee which impacts Aurobindo's overall liabilities as around 97% of its total outstanding debt is US dollar-denominated. The ratings will remain sensitive to further debt-funded acquisitions.

Aurobindo's medium-term revenue visibility will be driven by new product launches mainly in the US (around 30 products to be commercialised over the next six quarters). To manage the upcoming revenue growth, Aurobindo has a strong distribution network in the US and Europe through which it sells majority of its generic formulations.

Shares of the company declined Rs 4.3, or 0.36%, to settle at Rs 1,176. The total volume of shares traded was 37,003 at the BSE (Friday).