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Strong margins likely to sustain

Torrent Pharma’s (Torrent) Q1FY22 performance was largely in line with our estimates. Revenue grew 3.8% YoY to Rs21.3bn with international markets declining 9.8% offset by 18.2% growth in domestic market. US sales declined 2.7% QoQ to US$36mn vs estimated US$38mn. Better revenue mix and controlled S,G&A expenses led to EBITDA margin improvement of 170bps QoQ. Adj. PAT grew just 2.8% to Rs3.3bn due to increase in effective tax rate on account of deferred tax utilisation.

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 13.3% over FY21-FY23E and strengthening balance sheet with improving FCF generation. Retain ADD with a revised target price of Rs3,295/share.

* India growth strong, US stable: India business grew 18.2% led by strong recovery in acute and sub-chronic segments and ~6% price growth. 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 2.7% QoQ to US$36mn 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 9.3% YoY and constant currency growth was 12%. Germany revenues grew steady 5.7% YoY (flat in constant currency).

* EBITDA margin sustains at higher levels: Gross margin dropped 170bps to 72.4% due to higher growth in acute segment in India. However, S,G&A expenses were controlled with decline of 5.3%/3.0% YoY/QoQ resulting in 170bps jump in EBITDA margin to 31.7% vs estimated 31.5%. Management expects expense base to remain at current levels which means EBITDA margin would sustain at ~32%. We estimate EBITDA margin of 31.8% in FY22E and 32.0% in FY23E.

* Outlook: We estimate revenue, EBITDA and earnings to CAGRs at 10.0%, 11.7% and 13.3% respectively, over FY21-FY23E led by higher India growth (12.3% CAGR). Lower PAT growth is due to recognition of deferred tax expense which will lead to ~5% higher effective tax rate. RoE and RoCE would improve to 22.7% and 18.6%, 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 much below 1x by FY23E.

* Valuations and risks: We raise EBITDA estimates by 2-3% to factor in lower S,G&A expenses but lower EPS estimates by 4-6% FY22-FY23E due to deferred tax, though cash tax would remain low. We raise target EV/EBITDA(x) to 18.5x from 17.5x due to rising EBITDA contribution from India. Maintain ADD with a revised target of Rs3,295/share based on 18.5xFY23E EV/EBITDA (earlier: Rs2,940/share). Key downside risks: Delay in resolution of FDA issues and forex volatility.

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