Torrent Pharma: Cost controls not enough, recovery in key markets crucial

Torrent Pharmaceuticals’ impressive July-September quarter (Q2) performance lends confidence to its strength in the domestic arena. Continued resilience in chronic therapies and a rebound in acute therapy sales have led to the domestic business (nearly half of overall) grow 7 per cent year-on-year —  4.1 per cent sequentially — outperforming the Indian pharma market by 1 percentage point in the September quarter.

Chronic and sub-chronic therapies, accounting for 77 per cent of India sales, are outperforming the domestic market, say analysts.

The growth also continues to be driven by price hikes taken by Torrent. Analysts say similar price hike-led growth can be sustained.

Torrent's key brands, such as calcium supplement Shelcal and hypertension drug Losar, continue to do well, while new launches in cardiology, diabetes, and gastroenterology will contribute to future sales growth. However, other key geographies, such as Germany, Brazil, and the US, are also crucial to the firm’s growth and, in turn, aid the sustenance of its premium stock valuations.

Germany, accounting for 13 per cent of its sales, clocked 4 per cent sales growth (recovering from 6 per cent decline in the previous quarter), while the rest of the world (10 per cent of top line) also grew 3 per cent.

Segments like contract research and manufacturing services (7 per cent of sales) continue to outperform and grew 10 per cent YoY.

On the flip side, Brazil continued to degrow (down 18 per cent YoY versus 20 per cent decline in the April-June quarter), while US sales, which had declined 1 per cent in the June quarter, were down 14 per cent YoY in Q2. Temporary interruption in supplies of lipid control drug Sartans has impacted US sales. New launches are not so impacted by regulatory issues, while price erosion in the US base business continues, say analysts.

Thus, revival in US sales hinges on a resolution of regulatory issues raised by the Food and Drug Administration for the company’s Indrad and Dahej plants, add analysts.

The recovery in Brazil depends on economic recovery, and with near completion of quality control system upgrade in Germany, sales are expected to normalise in the March 2021 quarter, says HSBC.

With ex-India sales performance being a mixed bag, overall revenue grew 1 per cent YoY. The operating performance was lifted by cost controls and price hikes in the India business. Operating profit grew 17 per cent YoY and margins expanded 450 basis points. Net profit grew faster by 27 per cent YoY, helped by declining interest costs.

The sustenance of operational performance and an improvement in sales in the global markets holds the key to Torrent's prospects. HSBC, while awaiting clarity on selling and general costs in India and recovery in other markets, maintains a 'neutral' rating.

Even though analysts expect recovery in Germany, Brazil, and the US, with Motilal Oswal Securities expecting 31 per cent annual growth in earnings over FY20-23, the current valuations adequately factor in the potential earnings upside.