Maintain ADD on Torrent Pharma - In-line quarter; outlook stable - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Torrent's Q4 results were largely in line with estimates as strong trends in India (+10 YoY) and Germany (+23% YoY) offset weak US (-5% QoQ, price erosion, lack of new launches). While US business bottomed out in Q4, it is likely to witness only modest growth, given key plants of Dahej and Indrad remain impacted by OAI/WL issues with limited visibility on resolution timelines. The outlook for other key markets remains healthy as they continue to outperform the industry growth. Torrent continues to generate high FCF (INR17bn in FY21) and has repaid debt of INR9bn in FY21 (guides for similar reduction in FY22). Its strong India franchise (chronic focused portfolio) and superior ROCE profile (19%+ in FY23e vs. 13%+ for peers) justifies premium valuations. We marginally tweak estimates by -1%/0% in FY22/23e and revise TP to INR2,905 based on 16x FY23e EV/EBITDA. Maintain ADD.

In-line quarter: Revenue declined by 1% to INR19bn as healthy performance in India (+10% YoY) and Germany (+24% YoY, +14% in cc terms) was offset by muted growth in the US (-5% QoQ) and Brazil (-4% YoY, +19% in cc terms, currency depreciation offset market share gains). EBITDA margin remained stable at 30% (-38bps QoQ) as higher gross margin (+256bps QoQ, higher share of branded business, product mix) offset higher R&D (+203bps QoQ) and other expenses (+151bps QoQ).

India continues to outperform: Revenue grew by ~10% YoY in Q4 (vs. 5% IPM growth), led by recovery across segments, market share gains in new launches, and COVID-led boost to gastro, anti-coagulants and vitamins portfolio. Post the rationalisation of MRs (currently at ~3,600), the company aims to achieve an MR productivity of INR10lacs per month (vs. ~8.5 in FY21). We expect revenue to grow at 12% CAGR over FY21-23e, driven by recovery in volumes, new launches, and price led growth (~6-7%).

US bottomed out, but likely to remain subdued: US business quarterly run rate has come down from USD52mn in Q4FY20 to USD37mn, impacted by price erosion, lack of new launches, and discontinuation of sartans. Torrent expects the business to stabilise and improve marginally from Q4 level, driven by re-introduction of sartans (end of the year), commercialisation of Levittown facility (from Jun'21) and potential launch of Derma product (Dapsone, tentatively approved, litigation is ongoing).

Key call takeaways: (a) India - 15% IPM growth expected in 1HFY22; exploring partnerships to strengthen COVID portfolio; (b) Germany - ~7.1% market share (vs. 7% in Q3); growth likely to improve as supply normalises;(c) Brazil- guides to outperform local market growth of 8-10%; biz break-up: Branded (~90%), Gx (~10%), to discontinue tender business from Oct; (d) US- no updates from FDA on reinspection timelines; (e) Guidance for FY22 - GMs: ~73%, R&D: 6-6.5%, ETR: 22-25%, Capex: INR2.5-3bn, WC days: 90-100

Shares of TORRENT PHARMACEUTICALS LTD. was last trading in BSE at Rs.2731.45 as compared to the previous close of Rs. 2764.75. The total number of shares traded during the day was 11175 in over 1231 trades.

The stock hit an intraday high of Rs. 2800 and intraday low of 2715.7. The net turnover during the day was Rs. 30671556.

Source : Equity Bulls

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