Strong domestic business shot in the arm for Torrent Pharma stock

Turnaround of acquired Unichem biz, improving margins, and large brands to aid earnings

Shares of Torrent Pharmaceuticals have corrected by over 20 per cent since hitting 52-week highs in March. Concerns about the company’s US business after the full recall of a drug, notwithstanding the shutdown of a plant in the US, have led to worries regarding growth in the world’s largest health care market. Analysts, however, feel most concerns are now factored in the stock, while growth drivers remain in place. 

Torrent’s business is well balanced between India, Brazil, Germany, and the US, with India contributing to half the revenue. Though disruption in the US business may have some bearing, the India operations are likely to grow further and are a key value driver. 

An analysis of AIOCD Pharmasofttech AWACS data and the disclosures in the annual report by analysts at Nomura makes them feel that the key drivers of margin expansion remain in place. Nomura, thus, estimates a 288-basis points (bps) increase in earnings before interest, tax, depreciation and amortisation margin over FY19-22. 

The company’s acquisition of the portfolio of Unichem is also seeing margin improvement. Analysts at IIFL say Torrent is back to pre-Unichem productivity, within four quarters after the acquisition. The cost synergies are evident, say analysts, as sales, marketing, and promotional spending as a percentage of domestic revenue declined by 261 bps in 2018-19 and the company also balanced its employee strength. Besides, the company takes price hikes every year for most of its key products, and the annual price increase at the aggregate level is 200 bps higher than the broader market.

In the domestic arena, Torrent has focused on building large brands with annual revenues of over Rs 100 crore. The brand Shelcal, which was part of the portfolio acquired from Elder Pharmaceuticals, has grown from Rs 170 crore (per annum) before acquisition to Rs 450 crore now. The company now has nine brands contributing Rs 100 crore or more per annum, suggests analysts’ data. 

Torrent’s India sales are pegged to grow around 9 percent annually during FY19-21 by analysts at ICICI Securities, who also see sales in Germany growing 15 per cent annually. US sales are, however, seen growing by just 6 per cent annually.

Analysts at Nomura, after tweaking their forward earnings for lower US growth, foreign exchange, higher tax and depreciation, however, still see more than 20 per cent upside for the stock. Target prices of IIFL or ICICI Securities are also close to Nomura’s.