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The stock of Torrent Pharma Pharmaceuticals rallied as much as 25 per cent past week, after the company announced an impressive set of numbers for the first quarter of FY2020-21.

Its consolidated revenue grew 2 per cent (year-on-year) to ₹2,056 crore during the quarter despite the challenging environment. The consolidated net profit was up 49 per cent (y-o-y) at ₹321 crore aided by lower expenses.

Torrent’s India business, contributing around 45 per cent to its overall business, showed resilience during the quarter by growing 2 per cent, while the overall industry declined 6 per cent (y-o-y). Meanwhile, the other key markets for the company — the US, Brazil and Germany — posted a tepid performance during the quarter.

The company’s operating margin stood at 32 per cent during the period, up significantly compared with the 26.8 per cent recorded in the same quarter last year, thanks to lower other expenses and gross margin expansion.

The stock has rallied 59 per cent since our last ‘buy’ call given in November 2019.

The substantial rise is thanks to the strong growth prospects of the company’s India business comprising chronic and sub-chronic therapies.

At ₹2,940, Torrent’s stock trades at about 42.3 times its trailing 12-month earnings, which is slightly higher than its three-year average of 41.7 times. It is more expensive than similar-sized peers such as Cipla, Dr Reddy’s Laboratories and Sun Pharmaceutical Industries that trade at price earnings multiples of 37, 40 and 29 times, respectively. It is cheaper than Divi’s Laboratories, which is trading at 52 times.

Given the premium valuation, there seems to be limited upside in the stock in the near term. Strong earnings in the domestic market have also been priced in for now.

Revenue from the US, which is one of the key markets for Torrent, is also expected to be flat over the medium term as three of its key facilities have been under US Food and Drug Administration’s (FDA) scanner.

The firm’s US business registered tepid growth over the past few quarters owing to price erosion in key drugs and no meaningful launches.

Investors can hold the stock. Resolution of USFDA issues will be the next key growth driver for the stock as new product approvals in the US market could happen once these plants get clearances.

Robust business model

Torrent Pharma has a presence in stable growth markets, focussing on high-growth chronic and sub-chronic therapies. The company is ranked eighth in the India market; 75 per cent of the company’s domestic portfolio comprises chronic and sub-chronic therapies. It has a strong presence in key therapies, and ranks among the top five players in cardiac, central nervous system (CNS), vitamin minerals nutrients and gastrointestinal therapeutic areas.

The company enjoys a strong pricing power compared with its peers as around 90 per cent of the India portfolio is not covered under the National List of Essential Medicines (NLEM). Torrent’s prudent acquisitions of Elder Pharmaceuticals and Unichem Laboratories in the past few years place it among the top five drug-makers in the country.

Muted growth in US

Torrent’s key Indrad and Dahej plants (both in Gujarat) lately received a warning letter and an official action initiated (OAI) classification, respectively, from USFDA. Its US manufacturing plant at Levittown (Pennsylvania), too, got a warning letter for CGMP (Current Good Manufacturing Practice) violations.

Indrad is a key facility that contributes to more than 50 per cent of Torrent’s US revenue. While existing supplies from the facility will not be impacted, approvals of pending filings from the plant will be delayed. The management has indicated that it has completed its corrective and preventive actions (CAPA) around the areas highlighted by the USFDA and has submitted its responses.

However, given the lower dependence on the US (around 18 per cent of the overall sales), the impact on the overall earnings of Torrent should be limited.

As on June 30, 2020, 47 ANDAs (Abbreviated New Drug Applications) were pending approval in the US and six tentative approvals were received.

Torrent is ranked No 1 among the Indian pharma companies in Brazil, Germany and the Philippines. Torrent’s portfolio in Brazil also comprises chronic therapy (around 7 per cent of its overall revenue). The management has guided for 2-5 new product launches every year in Brazil.

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