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Steady quarter; margins remain strong

Torrent Pharma’s (Torrent) Q4FY21 performance was better than estimates on EBITDA and PAT led by better gross margin and higher other income. Revenue declined 0.5% YoY to Rs19.4bn with international markets declining 7.7% offset by 9.8% growth in domestic market. US sales declined 5.9% QoQ to US$37mn vs estimated US$40mn. Better revenue mix led to gross/EBITDA margin improvement of 150/180bps YoY. Adj. PAT grew 24.1% to Rs3.2bn, driven by better margin and higher other income.

We are positive on the long-term outlook considering growth improvement in India business with chronic segment dominance, potential resolution of OAI/WL status at two facilities in FY22E, EPS CAGR of 17.0% over FY21-FY23E and strengthening balance sheet with improving FCF generation. Retain ADD with a revised target price of Rs2,940/share.

* India growth strong, US underperforms:

India business grew 9.8% vis-a-vis 5.0% 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 5.9% QoQ to US$37mn due to price erosion and absence of new launches given USFDA issues. We expect US sales to improve hereon led by new launches from third party manufacturing and restart of Levittown facility. Brazil revenues declined 3.6% YoY due to currency depreciation despite constant currency growth of 19.0%. Germany revenues grew strong 23.6% YoY (14.0% in constant currency). ROW and CRAMS businesses were weak in Q4FY21 and reported decline in revenue.

* Better revenue mix helped in margin beat:

Gross margin improved 150bps to 74.4% led by higher sales of branded generics business. Management expect gross margin may remain ~73%. This resulted in 180bps increase in EBITDA margin as expenses also remained low. We believe expense base would increase from current levels and would revert closer to FY20 levels in FY22E. Overall, we expect EBITDA margin to sustain at ~30-31% over next two years on back of higher growth in India and operating leverage.

* Outlook:

We estimate revenue, EBITDA and earnings to CAGRs at 10.6%, 10.6% and 17.0% respectively, over FY21-FY23E led by higher India growth (12.0% CAGR). Return ratios dropped in FY19 post Unichem acquisition, but we expect RoE and RoCE to reach 24.0% and 19.9%, respectively, by FY23E. We also expect the company to bring down net debt by Rs24bn over FY22E-FY23E which would bring down net debt/EBITDA to a comfortable level below 1x by FY23E.

* Valuations and risks:

We marginally decline our revenue estimates to factor in weak US sales but raise EBITDA estimates by 0-1% FY22-FY23E to factor in higher gross margin. Maintain ADD raring with a revised target price of Rs2,940/share based on 17.5xFY23E EV/EBITDA (earlier: Rs2,757/share). Key downside risks: Delay in resolution of FDA issues and forex volatility.

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