Torrent Pharma: Acquired Elder portfolio accruing benefits

Price rises and operational efficiencies help improve latter's performance and overcome acquisition-related concerns

Torrent Pharmaceuticals was a star performer in the pharmaceutical segment in 2014, making investors richer more than twice over. The market capitalisation has crossed $3 billion (Rs 18,300 crore), up from $1.3 bn (Rs 8,000 crore) in this period.

Investors have been buying the scrip due to strong growth in America, fuelled by a series of generic launches, traction in the Brazilian market and domestic growth with the acquisition of Elder Pharma’s branded formulation business. Further, the recent tie-up with Reliance Life Sciences for marketing of three biosimilars, at various stages of develo-pment/approvals in India, is a positive. Biosimilars currently account for a small share of the overall pharma pie but Indian companies have been adding these to their portfolio to take advantage of a potential spurt in future sales.

While the acquisition of Elder’s business in India and Nepal was looked at with scepticism, things seems to be falling into place. The Street was initially concerned about the increase in debt, deal valuations and the low margin on Elder’s products. At 16 per cent for their basket, this was significantly lower than Torrent’s 22-23 per cent. However, the concerns were misplaced, as the Rs 913 crore deal, funded through a mix of debt and internal accrual, did not cause much stress on the balance sheet.

On profitability, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin of 24.7 per cent in FY14 (21.7 per cent in FY13) are expected to improve to 25.47 per cent in FY15, estimates Ambit Capital. The margin boost is expected to come from the Elder portfolio. Analysts at Ambit feel the Elder portfolio yielded Ebitda margins of around 60 per cent in the September quarter. Torrent’s Ebitda margin in that quarter was 22.4 per cent, compared to 18.4 per cent in the year-ago quarter. The reason for the improved performance was continued price increases, premium brand positioning and operational efficiencies. This has led analysts to upgrade growth estimates and Ebitda margins for the Elder business. Instead of the earlier estimate of a seven to eight-year payback, the period has been revised to five to six years.

The company’s US growth continues to be strong, with ageneric boost coming from products such as anti-depressant drug Cymbalta. Analysts at Nomura, citing an IMS report, say Torrent’s trailing three-month sales at the end of October was $64 million (Rs 384 crore), up 74 per cent over a year. Ex-Cymbalta, three-month sales grew 25 per cent over a year.

The Brazilian market has been a key performer for the company for some time. The geography that contributes 12-15 per cent to Torrent’s revenue is expected to keep the growth momentum going, with estimates of a 20 per cent uptick in FY15 as compared to 6.2 per cent growth in FY14.

On the domestic front, Torrent’s monthly sales improved significantly at 23.3 per cent in November after a decline in sales of 5.1 per cent in October. Surjeet Pal of Prabhudas Lilladher says sales growth had intially suffered because of the Elder incorporation. For the overall entity, analysts at Morgan Stanley estimate earnings will grow 22.5 per cent annually over FY13-16.