Buy Torrent Pharma - Prabhudas Lilladher

Torrent pharma has a successful track record of consistently delivering profitable growth: It is one of the better managed companies in the Indian pharma space with high standard of corporate governance. Company's international formulation business is expected to lead the performance of the company in the medium term.

It is a play on highly profitable and fast growing lifestyle segments in domestic formulation business: Torrent derives its strength from being leader in some of the lucrative and fastest growing chronic therapy segments of CVS and CNS. It has consistently maintained its leadership in these therapeutic segments with strong brands and new product launches. It has one of the most profitable domestic formulation business among its peers and even compared to larger counterparts. We believe that the recent slowdown in domestic formulation business is transitory and the management has taken corrective measures to address the slowdown. Expect growth to come back on track from 2HFY13 onwards.

Torrent's international business is on strong footing and expected to lead the performance: The company's investment in international business have started paying off and we expect profit margins to expand as operations scale-up. Healthy revenue growth expected in markets like US, Europe and Brazil and entry into some of the largest branded generics markets like Mexico, will drive revenue growth and increase profitability. Next phase of growth will be led by regulated markets (ex-Germany). Expect revenue from regulated markets (Ex-Germany) to grow at a CAGR of 34% over FY12-14, led by US market.

Outlook and Valuation: We expect strong EPS CAGR of 24% over FY12-14 led by 25% CAGR in international business. The company has strong balance sheet with lean working capital and zero net debt. Expect RoCE to remain above 25% over next 2 years and free cash-flow generation of Rs5.8b during the same period. The stock is trading at 14.0xFY13E and 11.3xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector.

Source : Equity Bulls

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