Torrent Pharmaceuticals - Steady quarter; debt reduction on track - ICICI Securities

Torrent Pharma's (Torrent) Q3FY21 performance was marginally below estimates with adj. PAT being impacted by lower other income. Revenue grew 1.5% YoY to Rs20.0bn with international markets declining 6.5% offset by 6.8% growth in domestic market. US sales declined 8.6% QoQ to US$39mn vs estimated US$45mn. Controlled costs aided 290bps jump in EBITDA margin to 30.4% (I-Sec: 31.0%). Adj. PAT grew 18.3% to Rs3.0bn, driven by better margin and lower interest expense. We are positive on the long-term outlook considering growth improvement in India business with chronic segment dominance, potential resolution of OAI status at two facilities in FY22E, EPS CAGR of 20.4% over FY20-FY23E and strengthening balance sheet with improving FCF generation. Retain ADD with a revised target price of Rs3,024/share.

- India growth in line, US underperforms: India business grew 6.8% vis-a-vis 6.4% growth in the industry. Company should continue to outpace industry in terms of growth considering its significant exposure to the chronic segment and established product portfolio. US revenues declined 8.6% QoQ to US$39mn due to price erosion and absence of new launches given USFDA issues. Brazil revenues declined 8.5% YoY due to currency depreciation despite constant currency growth of 16.0%. Germany revenues grew strong 21.0% YoY (10.0% in constant currency) and has completed installing new SOPs at its warehouse. RoW business declined 2.6% and CRAMS grew 31.8% YoY.

- Lower costs aid EBITDA margin, likely to reverse in FY22E: EBITDA margin improved 290bps YoY but declined 110bps QoQ to 30.4%, despite gross margin dropping 60bps YoY to 71.8 %. This improvement in EBITDA was supported by lower S,G&A and R&D expenditure. We believe expense base would increase from current levels and would revert to FY20 levels in FY22E. Overall, we expect 320bps EBITDA margin improvement over FY20-FY23E to 30.5%, driven by growth recovery in India and operating leverage.

- Outlook: We estimate revenue, EBITDA and earnings to CAGRs at 7.5%, 11.5% and 20.4% respectively, over FY20-FY23E led by higher India growth (10.0% CAGR). Return ratios dropped in FY19 post Unichem acquisition, but we expect RoE and RoCE to reach 24.9% and 20.9%, respectively, by FY23E. We also expect the company to bring down net debt by Rs34bn over FY20-FY23E which would bring down net debt to EBITDA comfortably lower than 1x by FY23E.

- Valuations and risks: We reduce revenue and EBITDA estimates by 0-1% and 1-4% respectively for FY21-FY23E to factor in lower US sales and increase in expense base. We maintain ADD with a revised target price of Rs3,024/share based on 18xFY23E EV/EBITDA (earlier: Rs3,014/share based on Sep'22E). Key downside risks: Delay in resolution of FDA issues and forex volatility.

Shares of TORRENT PHARMACEUTICALS LTD. was last trading in BSE at Rs.2602.4 as compared to the previous close of Rs. 2609.75. The total number of shares traded during the day was 21875 in over 1733 trades.

The stock hit an intraday high of Rs. 2632 and intraday low of 2595.8. The net turnover during the day was Rs. 57156833.

Source : Equity Bulls

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