Torrent Pharma - Turning aggressive - IIFL

Torrent Pharma's acquisition of the domestic branded portfolio from Elder is the right strategic move, although definitely expensive at ~4-4.5x revenue and 10-12x Ebitda (both oneyear forward). Under Torrent's better management, the business could see a growth spurt and Ebitda margin could be significantly better than '>35%' indicated by the management. The acquisition is dilutive near term; management guides to cash profit in Y2 and EPS accretion in Y3. The predictable nature of Torrent's business allows the significant balance sheet leverage required. We reduce our FY15 and FY16 core earnings estimates by 9% and 4% respectively. However, we believe the portfolio has the potential to surprise on the upside. Despite the cut in earnings estimates, we find Torrent shares attractively valued; maintain BUY.

High-end portfolio with significant synergies: The acquisition is exclusively in high-growth specialties and non-inclusion of any fixed assets will ensure superior profitability. Management's indication of >35% Ebitda margin is conservative. We expect 10-15% jump in the business soon after the takeover owing to easing of supply constraints and expect 14-15% Cagr to sustain thereafter. Major synergies in the acquisition include cross promotion of brands, complimentary regional strength, and additional distribution network for the existing business.

Balance sheet stretched; ROE to remain high: Debt/equity could go as high as 1.2 on completion; expect leverage to come off as the business generates cash in FY16 and FY17. Torrent's ROIC will come off from 48.4% in FY13 to 24.1% in FY16. However, ROE, at 33.1% in FY13, will not see significant correction as the leverage helps it stay up.

Stays among our top picks: Torrent Pharma's shares trade at 13x FY15ii core earnings. However, they are still the most attractively valued among peers considering quality of business, growth potential, healthy cash flows, and high return ratios. We expect re-rating of the stock to continue; our target price of Rs599 is 13.6x FY16ii core earnings.

Source : Equity Bulls

Keywords