TORRENT PHARMACEUTICALS Mixed performance :: Edelweiss

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􀂃 Mixed results; milestone income offsets margin pressure
Torrent Pharmaceuticals’ (TRP) Q2FY11 results were mixed. Net profit of INR 762
mn grew 4% Y-o-Y and was in line with our estimate of INR 743 mn but had
positive impact of milestone income from AZN (USD 2 mn) and forex gain (INR
65 mn) offset by lower margins in core business. EBITDA at INR 1.17 bn (versus
estimated INR 1 bn) was flat Y-o-Y. EBITDA margin (adj. for milestones
income/forex gain) was at 18% versus 20.7% in Q1FY11 and lower than our
estimate of 20.2%. This miss was primarily due to higher raw material costs
while fixed costs of INR 2.8 bn was broadly in line with our estimate. Net sales at
INR 5.8 bn grew 21% Y-o-Y, higher than our estimate of INR 5.4 bn, driven by
strong growth in domestic formulations.
􀂃 Growth momentum back in domestic formulations
Revenue growth (excl other operating income) was robust across domestic and
international markets and posted 21% Y-o-Y to INR 5.5 bn. Domestic
formulations grew 22% Y-o-Y (versus 13% Y-o-Y in Q1FY11) to INR 2.2 bn,
ahead of our estimate of INR 2 bn, led by volume growth of 20% offset by price
cuts of 3% undertaken in Q1FY11. International formulations continued to post
strong growth and grew 23% Y-o-Y to INR 2.7 bn (versus estimated INR 2.6 bn).
US grew 61% Y-o-Y (USD) while Heumann surprised positively with 38% Y-o-Y
(EUR) growth driven by tender wins and new product introductions.
􀂃 Revising estimates to factor in higher sales and lower margins
We are increasing our revenue estimates for FY11-12 by 3% to factor in
milestone income and higher sales growth in domestic formulations and
Heumann. We estimate core EBITDA margins to decline in FY11 (versus earlier
stable margin outlook) led by higher raw material costs during the quarter and
marginal increase in fixed costs, partly offset by higher sales growth and
milestone income. Hence, we are revising down our EPS for FY11 by 1%. We
broadly maintain our margin outlook (expect increase in margins from higher
scale in international formulations and reduced losses in US) and earnings
estimates for FY12.
􀂃 Outlook and valuations: Investments for growth; maintain ‘BUY’
We maintain our TP at INR 640, valuing TRP at 14x FY12E EPS of INR 44.5. We
expect extensive capital investments and product development in domestic/
international markets to impact earnings growth in the short term. However,
these investments will be accretive to revenue and earnings growth in FY12-13.
Further, potential supplies from out licencing deals from FY12 will add upsides to
our estimates. We maintain ‘BUY/Sector Outperformer’.