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India and Brazil support the growth

Torrent Pharma’s (Torrent) Q2FY22 performance was largely in line with our estimates. Revenue grew 5.9% YoY to Rs21.4bn led by 12.9% growth in India partially offset by decline in the US and Germany. US sales declined 2.8% QoQ to US$35mn vs estimated US$40mn. EBITDA margin declined marginally by 60bps YoY to 30.9% due to change in product mix and higher employee cost. Adj. PAT grew mere 1.9% to Rs3.2bn. We remain positive on the long-term outlook considering growth improvement in India business supported by its dominant chronic segment, potential resolution of OAI/WL status at two facilities in FY22E, EPS CAGR of 10.6% over FY21-FY23E and strengthening balance sheet with improving FCF generation. Retain ADD with a revised target price of Rs3,172/share.

* Business review: India business grew 12.9% led by strong recovery in acute and sub-chronic segments and ~8% price growth. Trade generic business contributed 1- 1.5% in domestic sales. US revenues declined 2.8% QoQ to US$35mn due to price erosion and absence of new launches given USFDA issues. We expect US sales to remain steady in near term and growth would start with new launches from third party manufacturing and restart of Levittown facility. Brazil revenues grew 20.9% YoY led by key products and two new launches. Germany revenues declined 3.8% YoY due to COVID-19 impact and inventory adjustment at client level post consolidation. EBITDA margins declined marginally by 60bps YoY to 30.9% with rising employee and R&D costs. While company expects EBITDA margin to gradually improve we estimate it to remain stable around 31-32% for the next two years.

* Concall Highlights: 1) Expect double digit growth in India which would outpace industry considering its significant exposure to the chronic segment and established product portfolio. 2) two products are expected to launch in Brazil before end of FY22E 3) Rs2.5-3bn of maintenance capex and Rs2-3bn is expected to be spent towards the end of FY22 for domestic expansion 4) Net debt is expected to come down to Rs35bn by end of FY22E.

* Outlook: We estimate revenue, EBITDA and earnings to CAGRs at 8.9%, 9.7% and 10.6% respectively, over FY21-FY23E led by higher India growth (12.3% CAGR). RoCE would improve to 17.9% in FY23E from 15.8% in FY21. 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 much below 1x by FY23E.

* Valuations and risks: We lower revenue and EPS estimates by 2-3% and ~4% respectively to factor in lower growth in Germany and US. Maintain ADD with a revised target of Rs3,172/share based on 18.5xFY23E EV/EBITDA (earlier: Rs3,295/share). Key downside risks: Delay in resolution of FDA issues, slowdown of domestic growth and forex volatility.

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