In line numbers; future holds on launch momentum
Q3 revenues remained flattish (up 1.5% YoY) at | 1995 crore (I-direct estimate: | 2072 crore) mainly due to 23.4% YoY decline in US formulations to | 292 crore. Domestic sales grew 6.8% YoY to | 930 crore. Brazil de-grew 8.5% YoY to | 173 crore. Germany business grew a robust 21.0% YoY to | 265 crore. EBITDA margins expanded 296 bps YoY to 30.4% (I-direct estimate: 30.5%) mainly due to lower other expenses amid lower travel and promotional spends. Subsequently, EBITDA grew 12.4% YoY to | 607 crore (I-direct estimate: | 632 crore). PAT grew 18.3% YoY to | 297 crore (I-direct estimate: | 289 crore) in line with operational performance.
India growth steady; acquisitions to enhance coverage
Domestic branded formulations including CRAMs comprise 50% of sales. Acquisition of Elder Pharma’s branded portfolio has added new therapies like nutraceuticals, gynaecology and helped fill up portfolio gaps. The Unichem acquisition has added branded portfolio comprising some power brands besides achievement of long term synergy benefits. Q3 saw continued recovery in sub-chronic segment while the chronic segment continued its growth momentum. We expect India sales to grow at ~11% CAGR in FY20-23E to | 4850 crore.
Volatility in export growth
Despite being a late entrant in US market, Torrent has built a healthy pipeline. Exclusivity (shared) launches like gCymbalta, gAbilify in past, have proven Torrent’s capabilities. To expand its presence in non-oral segments like derma, injectable, oncology, it has acquired Zyg Pharma, Bio-Pharm. The company also entered into a number of collaborations. However, due to cGMP related issues in Indrad, Dahej plants, we expect US business growth to be muted in near term owing to delay in launches. Going ahead, we expect continued ramp up in Germany business as upgradation of its quality management systems is now complete. We expect Germany to grow at ~11% CAGR in FY20-23E. Branded business in Brazil is likely to remain strong. Overall, despite near-term challenging macroeconomic factors, region-specific volatility on larger scale, growth prospects stay intact.
Valuation & Outlook
Q3 results were mostly in line with I-direct estimates (albeit skewed) on all fronts. While growth in India and Germany was mostly offset by decline in the US and Brazil, overall profitability was higher YoY amid lower on-ground activities and a lower tax rate. Overhang pertaining to two US focused plants notwithstanding, Torrent continues to impress thanks to its robust margin profile that can be attributed to global portfolio that comprises ~65% branded generics. We expect a further improvement in this matrix, product rationalisation to further strengthen margins. The company’s portfolio is finely balanced between India, Brazil, Germany and the US with India being the leader. With consistent FCF generation, moderation in core capex, we expect the leverage situation to improve substantially. With these key characteristics we believe the premium valuation is justified. We maintain BUY with a TP of | 3290 (earlier | 3135) based on 32x FY23E EPS of | 102.8.
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