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Published on 1/08/2020 11:28:05 AM | Source: Emkay Global Financial Services Ltd

Sell Torrent Pharma Ltd For Target Rs. 2,250 - Emkay Global

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Low opex drives margin beat, but may not sustain

* Torrent posted a solid 25% beat in EBITDA and a 500bps beat in margins. Revenues were broadly in line with estimates. Operating costs came off sharply due to lower promotional spends in branded markets – similar to what we have seen in other companies as well.

* India growth outperformed the industry, given the chronic skew, while US sales were weak due to reduced Rx and lack of approvals. Brazil growth was relatively stronger in CC terms, though currency headwinds impacted reported growth.

* Although EBITDA beat estimates sharply in Q1FY21, part of low opex (-300bps qoq) was on account of lower marketing spends, which should increase in subsequent quarters as doctor promotions pick up. We build in margins of 29.5% in FY21E vs. 32% in Q1.

* We raise FY21/22/23E EPS by 25%/11%/10% and increase the TP to Rs2,250, valuing the stock at 25x (unchanged) Jun’FY22E EPS (adjusting Rs8/share amortization costs. We have extended the amortization period for Unichem/Elder from 15 years to 30 years). We retain Sell and UW in sector EAP.

 

Revenues broadly in line: Against a decline in industry growth, TRP posted 2% positive growth yoy in India, due to its chronic skew. US declined ~10%qoq, with no new launches and lower Rx. Brazil plunged -20% due to currency headwinds (CC growth of 1% yoy due to the chronic portfolio). Germany continued to reel under logistic issues, though improving incrementally (+10% qoq growth in CC).

 

EBITDA surprises positively: The bigger surprise was on the EBITDA front with margins of 32% (vs. 27% est.). Part of lower opex (-300bps qoq) was on account of lower marketing spends, which should increase in subsequent quarters as MR activity picks up. We also expect a pick-up in R&D spends (-80bps qoq) and some cooling-off in gross margins. TRP guided FY21 gross margins to sustain in the 72-73% range vs. 74% reported in Q1. We build in FY21E EBITDA margins at 29.5% vs. 32.1% in Q1.

 

Retain Sell: We remain concerned about TRP’s continued weak volume growth (even preCovid-19) in India and we believe that pricing-led growth is unlikely to sustain in the longer run. This will likely impact TRP’s premium multiples. We increase our FY21/22/23E EPS by 25%/11%/10% and TP to Rs2,250 (Rs2,038 earlier) valuing the stock at 25x (unchanged) Jun’FY22E EPS (adjusting Rs8/share amortization costs. We have extended the amortization period for Unichem/Elder from 15 years to 30 years). We retain Sell and UW in EAP.

 

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