Robust performance of domestic biz to help Torrent Pharma outperform peers

Chronic-heavy portfolio, pharma market recovery boost shares

A strong operating performance in the June quarter and a robust outlook for domestic operations pushed the Torrent Pharma stock up 9.3 per cent.

While revenues were broadly in line with estimates, its operating profit and margin performance stood out. Operating profit jumped 22 per cent and margins improved by 32 per cent, compared to estimates of 27 per cent.

Though there was little help from the top line with consolidated sales closing just 2 per cent higher, there were two factors that aided profitability. The first was the product mix in the domestic business, and the other was lower costs. Other expenses fell 10 per cent YoY on account of lower promotions and falling costs related to medical representatives. 

However, analysts believe these benefits are not sustainable and could moderate.

Gains from domestic operations, however, offer some margin upside. Even as the domestic pharma market was down 6 per cent, Torrent Pharma reported 2 per cent growth.

This was driven by sales of the high-margin chronic segment, which was up 8 per cent.

 

 

Torrent has one of the largest exposures to the chronic segment, with sales from this category exceeding 70 per cent. Even as volumes remain muted, price hikes and demand in the cardiac, diabetic, and nutrient categories spurred sales growth. Brokerages expect the pharma market to recover after a weak showing in Q1. Torrent’s management indicated that the pharma will continue outperforming the domestic market in fy21. Over the last 12 months, Torrent has reported growth of 9.4 per cent — comfortably ahead of the industry growth of 6.1 per cent.

Analysts at Kotak Institutional Equities say productivity gains, 10 brands with sales above Rs 100 crore, and new launches in the cardiovascular and diabetes segments should set the stage for 10-11 per cent growth in the domestic market over the FY20-23 period. US operations will be hit by compliance issues at major facilities. With the firm filing 12-15 abbreviated new drug applications or ANDA every year, there should be strong growth from this region following resolution of affected plants.

Spark Capital expects Torrent to generate free cash flow of Rs 3,000 crore over the FY20-23 period. This would bring debt on its balance sheet down from Rs 5,170 crore at the end of FY20. Torrent has a debt reduction target of Rs 1,000 cr­o­re for FY21. Analysts at Spark value the firm at a 20 per cent premium to large-cap peers, given the higher contribution from branded markets (accounting for 53 per cent of revenue), large exposure to chronic therapies in the domestic business, and strong free cash flow generation.

Even though there are multiple triggers for the stock, the 48 per cent run-up since its March lows has adequately captured near-term upsi­des. Torrent shares are trading over 30x their FY22 earnings estimate, and could be a good long-term bet on dips.