Weak US outlook in near term, higher costs to weigh on Torrent Pharma

While the stock has corrected, valuations leave little room for upside

A lower-than-expected performance in the December quarter, muted near-term outlook for its US business, and expected rise in costs led to a 6.4 per cent fall in the stock price of Torrent Pharmaceuticals. Given the headwinds, analysts have cut their net profit estimates by 4-8 per cent for FY22 and FY23.

The immediate trigger for the pressure on the stock was the poor Q3 showing, led disappointment in the US business. Revenues in the US business was down 24 per cent YoY and 9 per cent on a sequential basis.

Lack of new product launches, and pricing pressure, as well as the discontinuation of sartans, used in treating hypertension, led to the fall in sales. Share of the US market to overall sales has dropped below 15 per cent, as compared to 20 per cent a year ago.

Given the single-digit product erosion, lack of clarity on timelines related to plant inspections by the US drug regulator, and limited opportunities in the current portfolio cloud the near-term outlook. Analysts at Motilal Oswal Research expect sales to grow at a sub-par 3 per cent annually over the FY20-23 period in this geography.

Growth will largely depend on the Indian market, which accounts for 47 per cent of its revenues. Sales in the quarter were up 7 per cent, led largely by the price increase, with volume contribution of 1 per cent. The company launched 17 products in M9FY21 and has been looking at 4-5 product launches in the current and next quarter. The company reduced the field force by 400 to 3,600, to focus on high growth brands and new launches, and reduce spending on brands which have shown muted growth.

In the German market, the company hopes to grow in double digits; in the Brazilian market, it expects to outperform local growth in constant currency terms on the back of new product launches.

Though the operating profit margin expanded 290 basis points YoY to 30.4 per cent, led by lower other expenses, this would come down going ahead. Promotional expenses, which were being controlled, as well as weak US revenues, would weigh on margins.

Most analysts have a neutral rating on the stock, given that valuation is near an all-time high; it is trading at a 20 per cent premium to the average valuation of peers.