Buy Torrent Pharmaceuticals Ltd For Target Rs.3,600 - Yes Securities
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Lackluster FY22 in store; await US resolution
Our view
After US, Germany wobbled in Q2 as customer consolidation led to inventory rationalization translating in to fall in German revenues. With uncertain German outlook, on top of continued US stagnancy, India and Brazil would be the key growth drivers in H2 FY22. FDA inspection would be a big positive though largely oral solids plants of Torrent may have a lower priority than injectables, in our view. An improved gross margin beckons in Q3 with better domestic mix though hiring of MRs to restrict margin upside in FY23.
A lackluster performance in Q2 leads to marginal cut in FY22 estimates as also further reduction in FY23 US/German sales estimate, leading to 7% cut to FY23 EPS. Albeit, we highlight that FDA inspection and a successful one at that would boost growth perception which we capture in our unchanged 35x multiple and FY24 US revenues. Roll over estimates to FY24 and retain BUY for revised TP Rs3,600, purely as a function of shifting to FY24 earnings.
Result Highlights
* Revenues at + 6% yoy came below our estimates of +8% yoy.
* India grew 13% (Adjusted for dispatch related delays last year, growth at 16%); MR productivity closing in on Rs1mn/month on the back of new launches, whereas continued price erosion in US led to 13% drop in sales (cc sales US$35mn). Brazil sales up strong 21% yoy vs market growth of 10% driven by new launches and price hikes taken in April. Supply chain issues and inventory normalization due to customer consolidation in Germany led to 4% drop in sales.
* US price erosion, higher share of acute mix in India and higher inventory provisioning led to a 1% drop in gross margins. Some of this impact is expected to reverse in the next quarter.
* EBITDA margin lower by 60bps YoY at 30.9%, below our estimates of 33%. Higher other income YoY aided PAT which was largely flat yoy vs estimated +16% yoy.
Valuations
Roll over estimates to FY24 and retain BUY for revised TP Rs3,600, purely as a function of shifting to FY24 earnings at 35x PE.
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