Torrent Pharma Q3FY11 Result Update; Buy; Target: Rs 650:: Emkay

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Torrent Pharma

In-line Results; Maintain Buy

BUY

CMP: Rs 583                                       Target Price: Rs 650

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n     Revenue growth in-line with our estimates on account of 17% increase in domestic formulations and 19% growth in the international business

n     EBITDA margins declined by 286bps YoY (as estimated) on account of 140bps contraction in gross margins, higher employee cost and other expenses

n     PBT in line with estimates. Higher than expected rise in interest cost and higher tax provisioning impacted PAT (Rs769mn vs. est. of Rs823mn)

n     Maintain earnings and Buy rating with a target price of Rs650

Revenues at Rs5.8bn is in-line with our estimate of Rs5.7bn

Torrent’s Q3FY11 revenue grew by 20% to Rs5.8bn, in-line with our expectations of

Rs5.7bn (including other operating income). Sales growth was on account of a) 17%

growth in the domestic formulation (branded) business (Rs2.1bn vs. est. of Rs2.2bn;

launched 18 new products), b) 37% growth in the CRAMS segment (Rs594mn vs. est.

of Rs475mn), and c) 18.5% growth in exports (Rs2.92bn vs. est. of Rs2.95bn). The

higher growth in the domestic formulation business was in spite of price reduction which

the company took on some of its products. Volume growth for the quarter was 18-19%,

however, price cut has impacted 2% growth in value. The company is also witnessing

good revenue traction from new therapies. Growth in the export formulation business

was driven by a) 13% growth in Brazil market to Rs920mn, b) 36% growth in US to

Rs367mn, c) 12% growth in RoW to Rs297mn, d) 27% growth in Europe to Rs393mn,

and e) 44% growth in Russia to Rs144mn. Heumann revenue during the quarter grew

by 15% to Rs760mn driven by new supplies of tender products.

EBIDTA margins contract by 286bps to 20% (as estimated)

Despite 21% growth in top line, EBITDA margins for the quarter declined by 268bps on

account of a) 140bps contraction in gross margins (due to higher contribution of

revenues from Heumans tender business this quarter), b) 28% increase in employee

cost, mainly because of field force expansion in India (added 500 people in second half

FY10) and Mexico (35 people), and c) 23% increase in other expenses, largely driven

by rise in SGA cost. Going forward, we expect its operating margins to remain subdued

in FY11E because of new recruitment in India, Brazil and Mexico, the benefit of which

will start reflecting from FY12E onwards.

 Higher than expected rise in interest and tax provisioning impacted PAT

Net profit for the quarter declined 7% to Rs769mn (against our expectation of Rs823mn) on

account of a) 32% increase in depreciation cost (Rs161mn vs. est. of Rs159mn), b) 16%

rise in interest cost (Rs35mn vs. est. of Rs30mn) and, c) higher tax provision (20.9% of PBT

vs. est. of 17%). EPS for the quarter works out to Rs9.1 (est. of Rs9.7) and Rs27.3 for

H1FY11 against our full year estimation of Rs36.9. Company has total debt of Rs5.9bn

(Rs5.1bn in Q2FY11) and a cash of Rs5.96bn (Rs3.82bn in Q2FY10) as on 31st Dec 2010.

Company has guided for a capex of Rs6bn over the next three years largely funded through

internal accruals.

Maintain earning estimates; retain buy

Torrents Q3FY11 results were in-line with our expectations. Going forward, we expect

Torrent to continue to report high revenue and earnings growth driven by a) 18% CAGR

growth in India, b) 19% CAGR growth in Brazil, c) Ramp-up in the US and c) upside from

alliances. Though in the short term, we expect margins to remain subdued because of

various initiatives which company has taken in India, Brazil and Mexico. However, in

FY12E, we expect most of these initiatives to start contributing meaningfully and with

upside from alliances in the emerging markets, we expect significant growth in FY12E,

FY13E and FY14E. With 21% earnings CAGR over FY10-12E and superior return profile (in

excess of 30%), we continue to remain positive on the stock. We retain our earning

estimates and Buy rating on the stock with a target price of Rs650. Any likely

announcements on expansion of current deals / signing of new deals will be key triggers to

watch out for.