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Profitability remains on uptrend

* Torrent Pharma (TRP) delivered an in-line operating performance in 3QFY24. Healthy EBITDA growth of 18% YoY was driven by superior growth in domestic formulation (DF) and LatAm. The lack of approvals and marginal price erosion in base business in the US affected the overall performance to some extent.

* We marginally lower our FY24 estimate by 3% to factor in lower other income. We maintain our estimates for FY25/FY26. We value TRP at 30x 12M forward earnings to arrive at a TP of INR2,540.

* TRP continues to build levers for its branded generics segment in DF/LATAM through a focused approach on existing brands, selective/differentiated product launches, and the addition of MRs to expand reach. Further, it is also gearing up for launches in the US generics segment from its Dahej site. Tender wins are improving its growth prospects in Germany as well. Accordingly, we expect a 30% earnings CAGR over FY24-25. Having said this, the valuation largely factors in this upside in earnings. Retain Neutral on the stock.

Product mix benefits offset to some extent by higher opex

* Sales grew 10% YoY to INR27b (in line). DF revenue grew 12.4% YoY to INR14.2b (52% of sales). Germany sales grew by 12% YoY to INR2.7b (10% of sales). LATAM business grew by 26% YoY to INR3.1b (11% of sales). US generics business declined 6% YoY to INR2.7b (10% of sales). ROW+CDMO sales were largely stable YoY at INR4.6b (16% of sales).

* Gross margin expanded 320bp YoY to 74.5% due to a better product mix.

* However, EBITDA margin expanded at a lower rate of 220bp YoY due to higher employee costs (up 120bp as % of sales), offset by lower other expenses (down 10bp as % of sales)

* Accordingly, EBITDA grew 18% YoY to INR8.7b (in line).

* After adjusting a one-off expense of INR88m, adj. PAT grew 19% YoY to INR3.8b (our est. INR4.4b).

* In 9MFY24, revenue/EBITDA/PAT grew 13%/19%/19% YoY to INR79.8b/INR24.9b/INR11.5b.

Highlights from the management commentary

* TRP expects to clock EBITDA margin of 31.8% in the base business going forward. We believe that new approvals in the US and improved utilization of recently added MRs in DF/Brazil provide scope for further margin improvement.

* New launches in US generics would start in 1QFY25. About 7-8 launches can be expected in FY25.

* TRP indicated about two potential launches in the chronic space in the DF segment over the next 12-15 months. ? About 15 products are awaiting approval in Brazil. TRP intends to build field force for dermatology for the Brazil market.

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