Maintain ADD on Torrent Pharma - Steady show - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Torrent's Q2 performance reflects resilience in India business (+7% YoY) EBITDA margin was strong at 31.5% (+450bps YoY, down 67bps QoQ) driven by cost savings. Barring US, most businesses witnessed improved traction. The company repaid debt of Rs4.4bn in 1H and is on track to reduce it by Rs10bn in FY21. We like Torrent's India franchise and its superior return profile. Higher contribution from India justifies the premium multiple over peers. We tweak our estimates by 6%/-3%/1% in FY21/22/23 and revise our TP to Rs2,675 (from Rs2745) based on 16x EV/EBIDTA. Maintain ADD.

Margin beat continues, to moderate in the future: Revenues grew by 1% to Rs20bn as good growth in India (+7% YoY), Germany (+4% YoY) was offset by Brazil (down 18% YoY, +5% in cc terms, currency depreciation) and US (down 9% QoQ, lack of new launches). Gross margin was impacted in Q2FY21 (72.5%, down 150bps QoQ) due to higher inventory provision. However, EBITDA margin was strong at 31.5% (+450bps YoY, -67bps QoQ) driven by lower other expenses (down 128bps QoQ, several one offs in Q1).

India continues to outperform: Revenues grew by 7% YoY vs. IPM growth of 1% for Q2FY21. Key brands such as Shelcal, Losar continue to do well. New launches in cardio, diabetes and gastro will contribute to sales growth. Field force activity was at 75-80% of pre-covid levels in Q2 with Sep month at ~90%+ levels. We expect India business to outperform the industry growth driven by chronic and semi-chronic portfolio (~77% of 1H sales). Price led growth is likely to continue for few years.

US business witnessed pressure: US business (USD43mn, down 9% QoQ, down 18% YoY) was impacted by price erosion, lack of new launches and discontinuation of sartans (plans to re enter after resolving issues). We expect gradual recovery in US driven by re launches from Levittown facility beginning from Mar 21 and new approvals (third party sourced).

Key call takeaways: a) India - Promotional spends to inch up as field force activity increases from ~75-80% in Q2 to 90%+ in Q3; b) Germany - issues are largely resolved, market share is back to 6% levels; c) Net debt at Rs42bn, Net Debt/EBITDA - 1.7x, repaid Rs4.4bn in 1H and on track to trim further in 2H; d) Dahej and Indrad - submitted CAPA, awaiting re-inspection; e) Brazil - phased discontinuation of tender business.

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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