IQPlus - PEFINDO lowered its ratings for PT Indofarma (Persero) Tbk. (INAF) and its Medium Term Notes (MTN) I/2012 to "idBBB+" from "idA-".

The downgrade is mainly driven by the Company's weakening profitability margin due to higher labor expense and higher raw material costs following Rupiah depreciation against US Dollar.

In addition, renovation during February to July 2013 caused some disruption in INAF.s production facility, resulting in higher toll manufacturing expense. Lower profitability has led to deterioration of INAF's financial leverage and cash flow protection ratios.

PEFINDO also revised the outlook of INAF to "Negative" from "Stable" as we expect that INAF's financial performance in the near term could further weaken if the Company could not adjust the selling prices to compensate the increase of raw material costs and could not achieve the targeted sales.

The rating could be lowered if there is no significant recovery on INAF's profitability, financial leverage and cash flow protection. PEFINDO may revise the outlook to "Stable" if the Company is able to manage its production cost and adjust its products selling prices, which will improve its financial performances.

The ratings reflect potential growth in the generic medicine segment and INAF's strong market position. The ratings are constrained by its weak cash flow protection, idle capacity in some production lines and the risk of raw material price fluctuation.

INAF is a state-owned company, which is engaged in the pharmaceutical and healthcare products, with the focus on generic medicine. As of September 30, 2013, INAF.s shareholders were Government of Indonesia (GOI) with 80.7% ownership and public (19.3%).