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Soft quarter; steady outlook

Torrent’s Q3 results were a tad below expectation due to a miss in the US (- 9% QoQ, price erosion, lack of new launches). EBITDA margin at 30.4% (+300bps YoY, -106bps QoQ) came in line with our estimate. Barring US, other markets witnessed recovery and are well on track to outperform industry growth. With cost normalisation, management expects margin in FY22 to taper down to ~29% levels from ~30%+ levels in FY21. We like Torrent’s India franchise (chronic focused portfolio) and its superior return profile, which justifies higher valuation multiple. The company repaid debt of Rs4bn in 3Q and is on track to reduce it by Rs10bn in FY21. We marginally tweak our estimates & revise the TP to Rs2,835, based on 16x FY23e EV/EBITDA. Maintain ADD.

* Topline marred by exchange loss, margins in line: Revenues grew by 2% to Rs20bn as good growth in India (+7% YoY), Germany (+21% YoY, +10% in cc terms) was offset by Brazil (-8% YoY, +16% in cc terms, currency depreciation offset new launches and volume growth) and US (-9% QoQ in cc terms, price erosion, lack of new launches). EBITDA margin declined by 106bps QoQ to 30.4% on the back of a lower gross margin (-70bps QoQ) and increase in other expenses (+44bps QoQ).

* India outperformance to continue: Revenues grew by 7% YoY vs. IPM growth of 6% for Q3FY21, led by recovery in market, growth in chronic/sub- chronic therapies. The company restructured its field force strength from 4,000 in Q2 to 3,600 at start of Q4 as it de-focuses on low growth brands. It expects to outperform the industry growth by 200bps, driven by price led growth (~5-6%) and new launches (~3-3.5%).

* US business witnessed pressure: US business (USD39mn, -9% QoQ, -24% YoY) was impacted by price erosion, lack of new launches and discontinuation of sartans. We expect gradual recovery on the back of new launches - 6 approved products, re-launches of 3-4 sartans, Levittown facility to contribute from Apr’21 and third-party sourced products.

* Key call takeaways: a) India – expect higher growth in Q4, aims to launch 4- 5 products in Q4 (17 YTD); b) Germany – ~7% market share (vs. the previous peak of 7.2% in Sep’19), targets to be among top 3 players with ~9-11% share in 2-3 years; c) Brazil – Branded Gx business grew by 10.1% vs. 7.9% industry growth, expects to launch 3-5 products; d) open to M&A in India, focus is on deleveraging; e) US – high single digit price erosion, Dahej and Indrad –awaiting response.

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