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TORRENT PHARMACEUTICALS
In line results; growth drivers intact
Results in line with expectations; stable margins despite cost pressures
Torrent Pharma (TRP) Q3FY11 net sales, at INR 5.77 bn, grew 20% Y-o-Y,
versus our estimate of INR 5.8 bn, led by higher operating income and strong
growth in CRAMs business. EBITDA grew 5% Y-o-Y, to INR 1.15 bn (versus
estimated INR 1.16 bn). EBITDA margin is stable at 19.9% versus 20.2% in
Q2FY11; adj. for forex/milestones, core margins were at 18.7% (versus 17.8%
in Q2FY11 and our estimate of 19.4%). This miss was largely due to higher
contribution from CRAMs (lower margin business) and relatively lower growth in
domestic formulations. PAT, at INR 769 mn (-7% Y-o-Y), was in line with our
estimate of INR 768 mn.
Higher growth in CRAMs offset domestic formulation miss
Revenue growth of 20% Y-o-Y (versus estimated 22% Y-o-Y) was impacted from
lower-than-expected growth in domestic formulations (16% versus 22%
estimates), as ramp-up from new division (specifically gynecology) remains
slower than earlier anticipated. Excluding this, revenue growth remains robust in
regulated markets (22% Y-o-Y), while CRAMs surprised positively with 40% Y-o-
Y growth. Other operating income of INR 223 mn includes INR 70 mn of forex
gain, not build in our estimates.
Growth drivers in place; we expect 27% earning CAGR over FY11-13E
TRP’s significant investment in last 12 months has led to margin decline (EBITDA
margin declined from 21.5% in FY10 to 19.7% in 9mFY11). We, however, expect
margins to recover (200bps over FY13E) as ramp-up in the field force and new
launches in Brazil/US start generating critical mass. We estimate revenue to post
20% CAGR, driven by: a) ramp up in domestic formulations (18% CAGR); b)
scaling up of Mexico; c) new product launches in Brazil; and d) 50% CAGR growth
in US. Moreover, TRP’s strategic tie-up with MNCs for emerging markets will
further add momentum to earnings (We estimate USD 50 mn revenue by FY14E).
We, thus, maintain our earnings estimate for FY11E and FY12E, respectively, and
introduce FY13E EPS estimate of INR 57 (27% CAGR over FY11-13E).
Outlook and valuations: Expect re-rating over 9-12m; maintain ‘BUY’
Post significant outperformance to the broad markets during last fiscal, TRP has
been a laggard in the past six months as earnings growth remains muted in the
past three quarters. With 27% earnings CAGR over FY11-13E, presence in higher
margin chronic segment and superior return profile (ROCE of 30%), we believe
valuations could see re-rating. We raise our TP to INR 720 (640 earlier) based on
16x FY12E EPS and re-iterate ‘BUY/Sector Outperformer’ on the stock.
Results in line with expectations; stable margins despite cost pressures
TRP continues to report steady growth across various businesses, while net profit growth
remains relatively subdued, due to higher fixed costs from accelerated investments in
various markets over last 12 months. Net sales (including other operating income), at
INR 5.77 bn, grew 20% Y-o-Y (est. of INR 5.85 bn), largely driven by higher milestone
income from Europe and sharp growth in CRAMs, partly offset by relatively lower growth
in domestic formulations (16% Y-o-Y versus our estimate of 22% Y-o-Y). Other
operating income grew 10% Q-o-Q to INR 223 mn versus our estimate of INR 170 mn,
largely due to forex gain of INR 70 mn, not build in our estimate.
EBITDA, at INR 1.15 bn, grew 5% Y-o-Y and had positive impact from forex gain (INR 70
mn versus INR 35 mn in Q3FY10). Excluding other operating income and forex gain,
EBITDA declined by 1% Y-o-Y to INR 923 mn, below our estimate of INR 990 mn.
EBITDA margins, at 19.9%, remain stable from 20.2% in Q2FY11 and were broadly in
line with our estimates. However, excluding favourable impact from forex gain, margins
were 18.7% versus 17.8% in Q2FY11 and lower than our estimate of 19.4%.
Gross margins, at 69.3%, expanded 85bps from 68.5% on Q2FY11, while fixed costs of
INR 2.85 bn increased by 25% Y-o-Y, in line with our expectation. We expect fixed costs
to remain high in the short term (led by product development, field force expansion,
registration expenses and marketing expenses for extensive product pipeline in various
regions).
PAT, at INR 769 mn, declined 7% Y-o-Y, in line with our estimates of INR 768 mn. Tax
rate, at 21%, was lower than our estimate (22%). We expect tax rates to remain at
current levels, going forward.
Higher growth in CRAMs offset domestic formulation miss
Net sales (excluding other operating income) grew 19.5% Y-o-Y, to INR 5.5 bn, with
higher growth across international markets and relatively lower growth in domestic
formulations.
Key segment performance is discussed below:
Branded formulations (including India, Brazil and Mexico) sales growth of 15.7% Y-o-
Y was relatively slower due to lower-than-expected growth of 16% Y-o-Y in domestic
formulations (against estimated 22%). Mexico sales are yet to ramp up and had
relatively smaller contribution of INR 11 mn (versus INR 13 mn in Q2 FY11).
• Domestic formulations growth of 16% (versus 22% in Q2FY11 and 13% in Q1FY11)
was led by volume growth of 17% and 1% growth in new products (offset by 2%
impact from price cuts undertaken for some key products such as Atenolol,
Atorvastatin, Clopidogril) in Q1FY11. TRP’s growth in the domestic business has been
lower than the covered market growth of 20%, largely due to delay in ramp-up from
new divisions (extra urban and gynecology) added during the past 3-4 quarters. The
company has carved out a new therapy (diabetology) and added 300 dedicated
market reps during the quarter (YTD FY11, the company added 400 people, taking the
field force to 3,600 people). It expects overall attrition rate (current 20%) to stabilise
in the next 2-3 quarters. We estimate current initiatives, in terms of field force
expansion and new divisions over FY10-11 to consolidate and be accretive to growth
over FY13.
• Brazil constant currency growth of 15% was in line with average industry growth.
Brazil and Mexico sales (INR terms) grew at 15% Y-o-Y, to INR 931 mn, below our
estimates. New product introductions are likely to commence by FY12; the company
expects to launch 6-7 products in Brazil and 6 products in Mexico. Mexico ramp-up has
been rather slow and is expected to achieve larger scale of operation over the next
year. TRP has launched four products in Mexico in the CNS segment, of its planned
pipeline of 30 products over the next 3-4 years.
Regulated markets (including the US, Europe and Germany) grew 21.5% Y-o-Y, to INR
1.5 bn, led by 100% Y-o-Y (in constant currency) growth in Europe, strong growth in
Heumann (30% Y-o-Y in EUR terms) and US (38% Y-o-Y to USD 8 mn).
• Heumann (Germany operations) grew 5% Q-o-Q to EUR 12.5 mn (versus EUR 11.9
mn in Q2 FY11), driven by tender wins over the past two quarters and new product
introductions. EU (excl Heumann) grew 23% Y-o-Y, 5% higher than our estimates.
• US growth of 38% Y-o-Y (in constant currency) has been led by incremental revenues
from three products launched during quarter. The company plans to launch one new
product in Q4FY11 (pantoprazole) and currently has 25 ANDA approvals, while it
markets 11 products. TRP has cumulative filings of 53 ANDAs and 28 pending
approvals.
CRAMS and licensing agreements: CRAMs (Insulin supply to Novo Nordisk)
contributes 10% of total sales and depicted sharp growth of 40% Y-o-Y, to INR 584 mn,
largely due to lower base in Q3FY10 and increased supplies to Novo. Incrementally, TRP
has entered into licensing agreements with AstraZeneca (for 23-24 products across
emerging markets) and a branded generics partner (for 50 products), with expected
supplies from Q4 FY12E. The management expects contribution of CRAMs to increase to
20% of total sales (over the next five years) from current 10% (YTD FY11) on the back
of these new licensing and supply agreements. We estimate incremental sales of USD 50
mn by FY14E and have build the same in our estimates.
Growth drivers in place; expect 27 % earning CAGR over FY11-13E
TRP’s significant investment in 9mFY11, to consolidate presence in various markets, has
led to margin decline (EBITDA margin down from 21.5% in FY10 to 19.7% in 9mFY11).
We, however, expect margins to recover (200bps to 21.5% over FY13E) as ramp-up in
the field force and new launches in Brazil/US starts generating critical mass. We estimate
revenue to post 19-20% CAGR, driven by: a) ramp up in domestic formulations (18%
CAGR); b) scaling up of Mexico; c) new product launches in Brazil; and d) 50% CAGR
growth in US. Moreover, TRP’s strategic tie-up with MNCs for emerging markets will
further add momentum to earnings, with supplies commencing from FY12 (expect USD
50 mn revenue by FY14E). We, thus, maintain our earnings estimate for FY11E and
FY12E, respectively, and introduce FY13E EPS estimate of INR 57 (27% CAGR over
FY11-13E).
Outlook and valuations: Expect re-rating over 9-12m; maintain ‘BUY’
Post significant outperformance to the broader markets during last fiscal, TRP has been a
laggard in the past six months as earnings growth remains muted in the past three
quarters. With 27% earnings CAGR over FY11-13E, presence in higher margin chronic
segment and superior return profile (ROCE of 30%), we believe valuations could see rerating.
Further, TRP has chalked out aggressive capex plan of INR 10 bn over the next
five years largely funded through internal accruals. TRP has a gross block of INR 6.5 bn
and a revenue base of INR 18.9 bn in FY10. Expanding capacity by 1.5x validates
management commitment and adds long term visibility to growth. Hence, we raise our
TP to INR 720 (640 earlier) based on 16x FY12E EPS and re-iterate ‘BUY/Sector
Outperformer’ rating on the stock.
Company Description
TRP, founded in 1959, is headed by Mr. Samir Mehta, a second generation entrepreneur.
The company is a leading player in branded generics space in India and Brazil. Domestic
formulations is the largest segment constituting 38% of FY10 sales. TRP is second
largest domestic player in chronic segments (CNS, CV, and anti-diabetic) which
constitutes 70% of its portfolio. The company’s branded generics business in Brazil is the
second largest segment and contributes 16% of total sales in FY10 and is one of the
largest operations by an Indian company in this crucial market. Apart from branded
generics TRP also has presence in regulated markets of US/Europe. The company also
has contract manufacturing business with Novo Nordisk for supply of insulin.
Investment Theme
TRP is in investment phase in various international markets, with projected capex outlay
of ~INR 10 bn, which are expected to scale up over FY12-13. Domestic formulations
business has depicted strong growth momentum from higher covered market growth and
field force expansion. The expansion into Tier-II cities will be incrementally positive for
growth over FY12-13E. . The company is also looking to expand its contracting model,
which could add upsides. We believe that these contract manufacturing deals as
structural positives for long term growth and would lead to a valuation re-rating in
medium term.
Key Risks
Slippages in domestic business could hurt revenue growth
TRP’s track record in the domestic business has been uneven. Continued execution
issues as faced in semi-urban and rural markets could slowdown the business and have a
disproportionate impact on overall company growth and margins.
Forex impact from adverse currency movement
Over the past quarter, USD and INR have been appreciating against EUR due to concerns
over deficits in Greece, Portugal and Spain. The company has fully hedged its exposure
in Europe, however, adverse currency movement could lead to translation losses. We do
not estimate impact from forex in our estimates.
Delay in product launches in Brazil
Our revenue assumptions for Brazil market estimate ~60 product launches in the next
three-five years, which is aggressive, and any slippage on product introductions could
negatively impact sales growth in this critical market.
Lack of ANDA approvals in US
The pace of new product approvals in US has slowed with only four approvals in FY10.
US accounted for ~45% of the overall company growth for FY10, hence low rate of
approvals could hurt growth in FY11-12E and delay expected turnaround in US
operations.
Capacity constraints
TRP has been envisaging capacity constraints, due to significant ramp-up in various
geographies and entry into new markets. The company has planned capital investments
of INR 10 bn over next 3-5 years. Any delay in commissioning of facilities could have
disproportionate impact on growth in various markets and could have long term
implications on the licensing contracts.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
TORRENT PHARMACEUTICALS
In line results; growth drivers intact
Results in line with expectations; stable margins despite cost pressures
Torrent Pharma (TRP) Q3FY11 net sales, at INR 5.77 bn, grew 20% Y-o-Y,
versus our estimate of INR 5.8 bn, led by higher operating income and strong
growth in CRAMs business. EBITDA grew 5% Y-o-Y, to INR 1.15 bn (versus
estimated INR 1.16 bn). EBITDA margin is stable at 19.9% versus 20.2% in
Q2FY11; adj. for forex/milestones, core margins were at 18.7% (versus 17.8%
in Q2FY11 and our estimate of 19.4%). This miss was largely due to higher
contribution from CRAMs (lower margin business) and relatively lower growth in
domestic formulations. PAT, at INR 769 mn (-7% Y-o-Y), was in line with our
estimate of INR 768 mn.
Higher growth in CRAMs offset domestic formulation miss
Revenue growth of 20% Y-o-Y (versus estimated 22% Y-o-Y) was impacted from
lower-than-expected growth in domestic formulations (16% versus 22%
estimates), as ramp-up from new division (specifically gynecology) remains
slower than earlier anticipated. Excluding this, revenue growth remains robust in
regulated markets (22% Y-o-Y), while CRAMs surprised positively with 40% Y-o-
Y growth. Other operating income of INR 223 mn includes INR 70 mn of forex
gain, not build in our estimates.
Growth drivers in place; we expect 27% earning CAGR over FY11-13E
TRP’s significant investment in last 12 months has led to margin decline (EBITDA
margin declined from 21.5% in FY10 to 19.7% in 9mFY11). We, however, expect
margins to recover (200bps over FY13E) as ramp-up in the field force and new
launches in Brazil/US start generating critical mass. We estimate revenue to post
20% CAGR, driven by: a) ramp up in domestic formulations (18% CAGR); b)
scaling up of Mexico; c) new product launches in Brazil; and d) 50% CAGR growth
in US. Moreover, TRP’s strategic tie-up with MNCs for emerging markets will
further add momentum to earnings (We estimate USD 50 mn revenue by FY14E).
We, thus, maintain our earnings estimate for FY11E and FY12E, respectively, and
introduce FY13E EPS estimate of INR 57 (27% CAGR over FY11-13E).
Outlook and valuations: Expect re-rating over 9-12m; maintain ‘BUY’
Post significant outperformance to the broad markets during last fiscal, TRP has
been a laggard in the past six months as earnings growth remains muted in the
past three quarters. With 27% earnings CAGR over FY11-13E, presence in higher
margin chronic segment and superior return profile (ROCE of 30%), we believe
valuations could see re-rating. We raise our TP to INR 720 (640 earlier) based on
16x FY12E EPS and re-iterate ‘BUY/Sector Outperformer’ on the stock.
Results in line with expectations; stable margins despite cost pressures
TRP continues to report steady growth across various businesses, while net profit growth
remains relatively subdued, due to higher fixed costs from accelerated investments in
various markets over last 12 months. Net sales (including other operating income), at
INR 5.77 bn, grew 20% Y-o-Y (est. of INR 5.85 bn), largely driven by higher milestone
income from Europe and sharp growth in CRAMs, partly offset by relatively lower growth
in domestic formulations (16% Y-o-Y versus our estimate of 22% Y-o-Y). Other
operating income grew 10% Q-o-Q to INR 223 mn versus our estimate of INR 170 mn,
largely due to forex gain of INR 70 mn, not build in our estimate.
EBITDA, at INR 1.15 bn, grew 5% Y-o-Y and had positive impact from forex gain (INR 70
mn versus INR 35 mn in Q3FY10). Excluding other operating income and forex gain,
EBITDA declined by 1% Y-o-Y to INR 923 mn, below our estimate of INR 990 mn.
EBITDA margins, at 19.9%, remain stable from 20.2% in Q2FY11 and were broadly in
line with our estimates. However, excluding favourable impact from forex gain, margins
were 18.7% versus 17.8% in Q2FY11 and lower than our estimate of 19.4%.
Gross margins, at 69.3%, expanded 85bps from 68.5% on Q2FY11, while fixed costs of
INR 2.85 bn increased by 25% Y-o-Y, in line with our expectation. We expect fixed costs
to remain high in the short term (led by product development, field force expansion,
registration expenses and marketing expenses for extensive product pipeline in various
regions).
PAT, at INR 769 mn, declined 7% Y-o-Y, in line with our estimates of INR 768 mn. Tax
rate, at 21%, was lower than our estimate (22%). We expect tax rates to remain at
current levels, going forward.
Higher growth in CRAMs offset domestic formulation miss
Net sales (excluding other operating income) grew 19.5% Y-o-Y, to INR 5.5 bn, with
higher growth across international markets and relatively lower growth in domestic
formulations.
Key segment performance is discussed below:
Branded formulations (including India, Brazil and Mexico) sales growth of 15.7% Y-o-
Y was relatively slower due to lower-than-expected growth of 16% Y-o-Y in domestic
formulations (against estimated 22%). Mexico sales are yet to ramp up and had
relatively smaller contribution of INR 11 mn (versus INR 13 mn in Q2 FY11).
• Domestic formulations growth of 16% (versus 22% in Q2FY11 and 13% in Q1FY11)
was led by volume growth of 17% and 1% growth in new products (offset by 2%
impact from price cuts undertaken for some key products such as Atenolol,
Atorvastatin, Clopidogril) in Q1FY11. TRP’s growth in the domestic business has been
lower than the covered market growth of 20%, largely due to delay in ramp-up from
new divisions (extra urban and gynecology) added during the past 3-4 quarters. The
company has carved out a new therapy (diabetology) and added 300 dedicated
market reps during the quarter (YTD FY11, the company added 400 people, taking the
field force to 3,600 people). It expects overall attrition rate (current 20%) to stabilise
in the next 2-3 quarters. We estimate current initiatives, in terms of field force
expansion and new divisions over FY10-11 to consolidate and be accretive to growth
over FY13.
• Brazil constant currency growth of 15% was in line with average industry growth.
Brazil and Mexico sales (INR terms) grew at 15% Y-o-Y, to INR 931 mn, below our
estimates. New product introductions are likely to commence by FY12; the company
expects to launch 6-7 products in Brazil and 6 products in Mexico. Mexico ramp-up has
been rather slow and is expected to achieve larger scale of operation over the next
year. TRP has launched four products in Mexico in the CNS segment, of its planned
pipeline of 30 products over the next 3-4 years.
Regulated markets (including the US, Europe and Germany) grew 21.5% Y-o-Y, to INR
1.5 bn, led by 100% Y-o-Y (in constant currency) growth in Europe, strong growth in
Heumann (30% Y-o-Y in EUR terms) and US (38% Y-o-Y to USD 8 mn).
• Heumann (Germany operations) grew 5% Q-o-Q to EUR 12.5 mn (versus EUR 11.9
mn in Q2 FY11), driven by tender wins over the past two quarters and new product
introductions. EU (excl Heumann) grew 23% Y-o-Y, 5% higher than our estimates.
• US growth of 38% Y-o-Y (in constant currency) has been led by incremental revenues
from three products launched during quarter. The company plans to launch one new
product in Q4FY11 (pantoprazole) and currently has 25 ANDA approvals, while it
markets 11 products. TRP has cumulative filings of 53 ANDAs and 28 pending
approvals.
CRAMS and licensing agreements: CRAMs (Insulin supply to Novo Nordisk)
contributes 10% of total sales and depicted sharp growth of 40% Y-o-Y, to INR 584 mn,
largely due to lower base in Q3FY10 and increased supplies to Novo. Incrementally, TRP
has entered into licensing agreements with AstraZeneca (for 23-24 products across
emerging markets) and a branded generics partner (for 50 products), with expected
supplies from Q4 FY12E. The management expects contribution of CRAMs to increase to
20% of total sales (over the next five years) from current 10% (YTD FY11) on the back
of these new licensing and supply agreements. We estimate incremental sales of USD 50
mn by FY14E and have build the same in our estimates.
Growth drivers in place; expect 27 % earning CAGR over FY11-13E
TRP’s significant investment in 9mFY11, to consolidate presence in various markets, has
led to margin decline (EBITDA margin down from 21.5% in FY10 to 19.7% in 9mFY11).
We, however, expect margins to recover (200bps to 21.5% over FY13E) as ramp-up in
the field force and new launches in Brazil/US starts generating critical mass. We estimate
revenue to post 19-20% CAGR, driven by: a) ramp up in domestic formulations (18%
CAGR); b) scaling up of Mexico; c) new product launches in Brazil; and d) 50% CAGR
growth in US. Moreover, TRP’s strategic tie-up with MNCs for emerging markets will
further add momentum to earnings, with supplies commencing from FY12 (expect USD
50 mn revenue by FY14E). We, thus, maintain our earnings estimate for FY11E and
FY12E, respectively, and introduce FY13E EPS estimate of INR 57 (27% CAGR over
FY11-13E).
Outlook and valuations: Expect re-rating over 9-12m; maintain ‘BUY’
Post significant outperformance to the broader markets during last fiscal, TRP has been a
laggard in the past six months as earnings growth remains muted in the past three
quarters. With 27% earnings CAGR over FY11-13E, presence in higher margin chronic
segment and superior return profile (ROCE of 30%), we believe valuations could see rerating.
Further, TRP has chalked out aggressive capex plan of INR 10 bn over the next
five years largely funded through internal accruals. TRP has a gross block of INR 6.5 bn
and a revenue base of INR 18.9 bn in FY10. Expanding capacity by 1.5x validates
management commitment and adds long term visibility to growth. Hence, we raise our
TP to INR 720 (640 earlier) based on 16x FY12E EPS and re-iterate ‘BUY/Sector
Outperformer’ rating on the stock.
Company Description
TRP, founded in 1959, is headed by Mr. Samir Mehta, a second generation entrepreneur.
The company is a leading player in branded generics space in India and Brazil. Domestic
formulations is the largest segment constituting 38% of FY10 sales. TRP is second
largest domestic player in chronic segments (CNS, CV, and anti-diabetic) which
constitutes 70% of its portfolio. The company’s branded generics business in Brazil is the
second largest segment and contributes 16% of total sales in FY10 and is one of the
largest operations by an Indian company in this crucial market. Apart from branded
generics TRP also has presence in regulated markets of US/Europe. The company also
has contract manufacturing business with Novo Nordisk for supply of insulin.
Investment Theme
TRP is in investment phase in various international markets, with projected capex outlay
of ~INR 10 bn, which are expected to scale up over FY12-13. Domestic formulations
business has depicted strong growth momentum from higher covered market growth and
field force expansion. The expansion into Tier-II cities will be incrementally positive for
growth over FY12-13E. . The company is also looking to expand its contracting model,
which could add upsides. We believe that these contract manufacturing deals as
structural positives for long term growth and would lead to a valuation re-rating in
medium term.
Key Risks
Slippages in domestic business could hurt revenue growth
TRP’s track record in the domestic business has been uneven. Continued execution
issues as faced in semi-urban and rural markets could slowdown the business and have a
disproportionate impact on overall company growth and margins.
Forex impact from adverse currency movement
Over the past quarter, USD and INR have been appreciating against EUR due to concerns
over deficits in Greece, Portugal and Spain. The company has fully hedged its exposure
in Europe, however, adverse currency movement could lead to translation losses. We do
not estimate impact from forex in our estimates.
Delay in product launches in Brazil
Our revenue assumptions for Brazil market estimate ~60 product launches in the next
three-five years, which is aggressive, and any slippage on product introductions could
negatively impact sales growth in this critical market.
Lack of ANDA approvals in US
The pace of new product approvals in US has slowed with only four approvals in FY10.
US accounted for ~45% of the overall company growth for FY10, hence low rate of
approvals could hurt growth in FY11-12E and delay expected turnaround in US
operations.
Capacity constraints
TRP has been envisaging capacity constraints, due to significant ramp-up in various
geographies and entry into new markets. The company has planned capital investments
of INR 10 bn over next 3-5 years. Any delay in commissioning of facilities could have
disproportionate impact on growth in various markets and could have long term
implications on the licensing contracts.
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