IGI Logo

Steady quarter; debt reduction on track

Torrent Pharma’s (Torrent) Q3FY21 performance was marginally below estimates with adj. PAT being impacted by lower other income. Revenue grew 1.5% YoY to Rs20.0bn with international markets declining 6.5% offset by 6.8% growth in domestic market. US sales declined 8.6% QoQ to US$39mn vs estimated US$45mn. Controlled costs aided 290bps jump in EBITDA margin to 30.4% (I-Sec: 31.0%). Adj. PAT grew 18.3% to Rs3.0bn, driven by better margin and lower interest expense. We are positive on the long-term outlook considering growth improvement in India business with chronic segment dominance, potential resolution of OAI status at two facilities in FY22E, EPS CAGR of 20.4% over FY20- FY23E and strengthening balance sheet with improving FCF generation. Retain ADD with a revised target price of Rs3,024/share.

* India growth in line, US underperforms: India business grew 6.8% vis-a-vis 6.4% 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 8.6% QoQ to US$39mn due to price erosion and absence of new launches given USFDA issues. Brazil revenues declined 8.5% YoY due to currency depreciation despite constant currency growth of 16.0%. Germany revenues grew strong 21.0% YoY (10.0% in constant currency) and has completed installing new SOPs at its warehouse. RoW business declined 2.6% and CRAMS grew 31.8% YoY.  Lower costs aid EBITDA margin, likely to reverse in FY22E: EBITDA margin improved 290bps YoY but declined 110bps QoQ to 30.4%, despite gross margin dropping 60bps YoY to 71.8 %. This improvement in EBITDA was supported by lower S,G&A and R&D expenditure. We believe expense base would increase from current levels and would revert to FY20 levels in FY22E. Overall, we expect 320bps EBITDA margin improvement over FY20-FY23E to 30.5%, driven by growth recovery in India and operating leverage.

* Outlook: We estimate revenue, EBITDA and earnings to CAGRs at 7.5%, 11.5% and 20.4% respectively, over FY20-FY23E led by higher India growth (10.0% CAGR). Return ratios dropped in FY19 post Unichem acquisition, but we expect RoE and RoCE to reach 24.9% and 20.9%, respectively, by FY23E. We also expect the company to bring down net debt by Rs34bn over FY20-FY23E which would bring down net debt to EBITDA comfortably lower than 1x by FY23E.

* Valuations and risks: We reduce revenue and EBITDA estimates by 0-1% and 1- 4% respectively for FY21-FY23E to factor in lower US sales and increase in expense base. We maintain ADD with a revised target price of Rs3,024/share based on 18xFY23E EV/EBITDA (earlier: Rs3,014/share based on Sep’22E). Key downside risks: Delay in resolution of FDA issues and forex volatility.

To Read Complete Report & Disclaimer Click Here