Torrent Pharmaceuticals - Operating leverage story to continue - ICICI Securities

Torrent Pharma's (Torrent) EBITDA margin has consistently improved over the years backed by superior business mix, strong execution and operating leverage. EBITDA margin improved ~400bps over FY18-FY20 and we expect it to improve further 350bps over FY20-FY23E driven by operating leverage and improving revenue mix. We are positive on the long-term outlook considering growth improvement in India business with dominance of chronic segment, potential resolution of OAI status at two facilities in FY21, EPS CAGR of 24.2% over FY20-FY23E and strengthening balance sheet with growing free cash flows. However, considering recent rally in stock price post Q1FY21 results, we downgrade it to ADD from Buy with a revised target price of Rs2,874/share.

- India business outperformance to continue: Torrent has been consistently outperforming the industry growth in India by ~200-300bps due to higher concentration of chronic portfolio. We expect this trend to continue and estimate 10.9% revenue CAGR over FY20-FY23 in India business. Chronic segments contribute ~73% of India sales with dominance of cardio and neuro segments which grow ~400-500bps higher than industry. We expect that proportion of India business would improve to 46% of total revenue and 63% of total EBITDA by FY23E.

- US revenue to pick-up post USFDA resolution: US revenue has been largely flattish over past several quarters at ~US$50mn per quarter due to lack of new approvals. Resolution of USFDA issues at Dahej and Indrad plants is crucial for revenue to pick up which we expect from FY22E. We have assumed resolution by FY21 end as company is awaits virtual audit of the facilities. We expect US sales to grow at 4.2% CAGR over FY20-FY23 to US$234mn, after declining 4.7% in FY21E due to lack of product approvals.

- Outlook: We estimate revenue/EBITDA/EPS CAGRs of 9.2/13.6/24.2%, over FY20-FY23E led by higher India growth (10.9% CAGR) and operating & financial leverage. Operating leverage in India business would result from the cost savings seen in Q1FY21 which would be partially sustainable. Financial leverage would be a function of flattish depreciation with constant reduction in interest cost on repayment of debt. We expect the company to repay Rs30bn debt over next three years which would bring down net debt to EBITDA to 0.5x by FY23E. The RoE and RoCE would also improve to 21.8% and 26.6% by FY23E, one of the best among peers.

- Valuations and risks: We increase the EPS estimates for FY21E-FY22E by 2-3% to factor improving operational performance and also introduce FY23 estimates with a revenue/PAT growth of 10.2%/18.5%. We remain positive on the long term outlook. However, the rally in stock post Q1FY21 results has capped the upside. We downgrade it to ADD from Buy, with a revised target price of Rs2,874/share based on 18xFY22E EV/EBITDA (earlier: Rs2,834/share). Key downside risks: Delay in resolution of FDA issues and forex volatility.

Shares of TORRENT PHARMACEUTICALS LTD. was last trading in BSE at Rs.2666.7 as compared to the previous close of Rs. 2705.8. The total number of shares traded during the day was 18590 in over 1922 trades.

The stock hit an intraday high of Rs. 2736.35 and intraday low of 2619.5. The net turnover during the day was Rs. 49884240.

Source : Equity Bulls

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