Torrent Pharmaceuticals - Domestic outperforms; margin sustains - ICICI Securities

Torrent Pharma's (Torrent) Q2FY21 performance was mixed with reported revenue below estimates but lower cost boosting EBITDA above estimates. Revenue remained flat YoY with international markets declining 6% offset by 7% growth in domestic market. US sales declined 9.3% QoQ to US$43mn vs estimated US$48mn. Controlled costs aided 450bps jump in EBITDA margin to 31.5% (I-Sec: 29.5%). Adjusted PAT grew strong 27.0% to Rs3.1bn, as estimated 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 FY21E, EPS CAGR of 23.0% over FY20-FY23E and strengthening balance sheet with improving FCF generation. Retain ADD.

- India continues to grow, US underperforms: India business grew 7.1% vis-a-vis ~1% 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 9.3% QoQ to US$43mn due to temporary discontinuation of sartans, price erosion and absence of new launches. Brazil revenues declined 17.3% YoY due to currency depreciation despite constant currency growth of 5%. Germany revenues grew 4.4% YoY and has largely completed installing new SOPs at its warehouse. RoW business and CRAMS grew 3.1% YoY and 10.3% YoY respectively.

- Controlled costs aid EBITDA margin: EBITDA margin improved 450bps YoY but declined 60bps QoQ to 31.5%, ahead of our estimates, despite gross margin dropping 70bps YoY and 150bps QoQ to 72.5%. This improvement in EBITDA was supported by lower S,G&A and R&D expenditure. We believe expense base would increase from current levels but still be lower than FY20. Overall, we expect 420bps EBITDA margin improvement over FY20-FY23E to 31.5%, driven by strong growth in India and operating leverage.

- Outlook: We estimate revenue and earnings to CAGRs at 7.6% and 23.0% respectively, over FY20-FY23E led by higher India growth (10.4% CAGR). Return ratios dropped in FY19 post Unichem acquisition, but we expect RoE and RoCE to reach 26.0% and 21.4%, respectively, by FY23E. We also expect the company to repay Rs20bn debt over next two years which would bring down net debt to EBITDA comfortably lower than 1x by FY23E.

- Valuations and risks: We reduce revenue and EPS estimates by 3-4% and 0-3% respectively for FY21-FY23E to factor in lower sales in the export business and reduced expenses. We maintain ADD with a revised target price of Rs3,014/share based on 18xSep'22E EV/EBITDA (earlier: Rs3,080/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.2654.45 as compared to the previous close of Rs. 2734.35. The total number of shares traded during the day was 23676 in over 2381 trades.

The stock hit an intraday high of Rs. 2773.85 and intraday low of 2644. The net turnover during the day was Rs. 63804283.

Source : Equity Bulls

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