Why you should accumulate shares in Torrent Pharma

Torrent Pharma performed the domestic branding activities well and replicated them in the Brazilian market. The problem over the past two years, however, has been the generic side of the business, which operates in the U.S. and German markets with a 24% revenue contribution. Efforts to expand into these markets have been unsuccessful over the past two years. While the triggers for changing the generic lead line status quo may not be immediately available, the margin improvement plans the company has put in place are encouraging. That led to a 10% rise in the share price on Thursday after earnings.

After two years of generic erosion, further decline should be limited. Investors can stock up on any correction from here with improved margins and sustained growth in the Brazilian and Indian markets is expected from Q1 FY23. However, investors should note that the company’s expected US FDA inspection a share price represents a critical risk for the company, even if the valuation contribution from US companies is currently minimal.

industries and companies

Torrent has a prominent presence in the Cardiovascular, CNS, Anti-Diabetes and Gastrointestinal markets in India (50% revenue contribution in FY22). It successfully acquired and integrated brands from Elder Pharma (£2,000bn in 2013-14), Unichem (£3,600bn in 2017-18) and most recently Dr. Reddy’s (four brands). Also in Brazil (9% of sales), Torrent is the leader in branded generics for its essentially chronic portfolio. A portfolio of generics of similar brands is also being built in the Philippines and other developing markets, which now account for another 10%. That makes Torrent a 70% branded generic maker with a largely chronic portfolio, which bodes well from a pricing perspective. While on the generic side, price falls are common across all companies, Torrent is reporting sharp double-digit falls in the US as a lack of new launches limits growth. US factory inspection and approval for Indrad and Dahej is critical for new launches.

Sales Outlook

To mark : Torrent had streamlined its product and people in India following the acquisition of Unichem and reported 15% revenue growth in FY22 (after two years of mid-single digit growth), along with the best sales team in the industry (nearly 10 lakh per month). Employee). Now, Torrent intends to drive new product launches in India, supported by a 13 percent increase in sales force, to be completed by H1FY23, to increase geographic coverage and a broader shopping cart. Four from Dr. Redddy’s acquired brands could add 1-2% additional growth in FY23, supporting 13-15% growth in India for at least the next two years.

Brazil also added 5 products in the CNS division in Q4FY22, accounting for more than half of the 32% yoy growth in Q4FY22 and expected to continue increasing over the next three quarters. Over the long term, torrent can keep up with the mid-single-digit market growth in Brazil; Complemented by the cross-selling of its portfolio from India, Torrent is expected to achieve above-market growth in Brazil.

generics: The American generics sector has accumulated 50 to 55 ANDA (Abbreviated New Drug Application) out of which 27 products would just await factory approval. Torrent also launched a new derma product (Dapson) with limited competition at T4FY22. However, with a lack of speed to market until factories are FDA approved, severe erosion of the existing base can only result in flat to negative growth for the segment, even with the recent re-launch. Revlimid’s high-value launch is not tied to a facility clearance and can represent a significant opportunity even at a late-stage launch (which it may be) and is currently the only silver liner in the generic drug industry in the United States. Likewise, the German bidding market is facing intense competition that is taking away pricing capacity from torrent, which could also be the case in the new bidding round starting H2FY23, indicating stable revenue growth.

margin outlook

Torrent’s weak revenue growth in the restructuring phase (4% CAGR in FY20-22) may not be fully offset by the 12% CAGR forecast for FY22-24 (combined CAGR of 8% in FY20-24). Despite growing brand segments, the US and German markets are holding back sales.

Torrent has now announced a series of measures aimed at improving margins to complement revenue growth. After a cost-benefit analysis, it closed its US cash facility. Following impairment charges in Q4 FY22, management says it can save £135bn a year in operating costs, boosting its EBITDA margin (by around 100-120 basis points). Torrent is also in the process of optimizing production and cutting costs, which should increase margin by another 80 to 100 basis points, even if freight, raw material, and energy costs remain high. Added to this are price increases in brand stores. Torrent is expected to return to an EBITDA margin of 29-30% on these metrics after slipping to 26% in H2FY22. The resumption of launches in the US will boost margin growth instead of the downward pressure of the last two years, but that depends on the factory clearance.


The brand’s business prospects are good

Margins should return to higher levels

Proven pricing power of bundled activities.

Finance and Valuation

Torrent reported FY22 revenue growth of 6.3% to £8,500bn with EBITDA margins falling 240 basis points to 28.6% mainly due to erosion and operating costs in the United States (MR and Freight) is due. Net debt to EBITDA is 1.3x (3,400 crore net debt), which the company hopes to wipe out over the next two years if Torrent’s Indian market-focused acquisition game could pick up.

Torrent is trading at 26 times FY24 earnings and the premium is attributable to the presence of the company’s brand (23 times adjusting for the amortization of acquired assets). This is in line with its average rating over the past 5 years and a discount of 15% to the valuation range over the last 6 months. Investors can check the status of the US FDA asset and near-term margin growth pattern and collect torrent stocks at any available valuation decline.

Published on

May 28, 2022

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