Buy Torrent Pharmaceuticals Ltd For Target Rs. 3,500 - Yes Securities
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Domestic strength to offset muted US Q4
Our view
US business proved a surprise offset with a sharp price erosion QoQ which led to margin weakness in Q3. Expect some of the gross margin weakness to reverse in FY23 as select product launches like Dapsone garner approval in Q4. Our presumption of growth driven by domestic and Brazil markets while US and Germany remain lackluster has played out to a large extent and we look to rebound, especially in US business; albeit, a meaningful change in topline would be dependent upon Dahej and Indrad clearance. MR hiring in domestic business signals management confidence on growth without any major dilution in margin. We cut FY22 gross margin to factor in the negative surprise in Q3 though outer year margins remain largely unchanged. While near term outlook appears muted due to US pricing pressure, we look beyond Q4 and believe strength in domestic business and optionality of US would help support multiples. BUY stays based on 35x FY24 EPS.
Result Highlights
* Revenues up 6% YoY at Rs 21,080mn, but below our estimates of +8% yoy.
* US sales were down 17% sequentially and ‐20% YoY due to higher price erosion in base business (~19% QoQ) and lack of new approvals.
* India sales were up 15% YoY with top brands performing well but Germany was down 11% YoY mainly impacted due to increasing competition and muted market growth.
* Gross margin came in at 69.7% falling by 242 bps sequentially and 210bps on a YoY basis largely driven by US pricing pressure and some lingering impact of input cost hikes
* EBITDA margins got impacted by higher other expenses, coming in at 25.5%, 536bps fall QoQ and 490bps YoY.
Valuation
While near term outlook appears muted due to US pricing pressure, we look beyond Q4 and believe strength in domestic business and optionality of US would help support multiples. BUY stays based on 35x FY24 EPS.
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