Torrent Pharma (TRP IN) OW: Weak quarter, staying Overweight  HSBC Research

Torrent Pharma (TRP IN)
OW: Weak quarter, staying Overweight
 Reported net loss includes one-time provisional charge for
future sales return; excluding that, EBITDA is in-line with
estimate
 Indian sales continue to suffer from slow acute growth,
Brazil, US, and Germany in-line; exports outlook strong on
favorable INR and turnaround in markets
 Maintaining OW, dropping V-flag, rolling TP to Mar-13;
revised TP to INR715 (13x Mar-14 EPS) from INR680

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TRP reported 4QFY12 net loss of INR16.5m, due to a one-time INR654m provision for
estimated future sales returns. Sales growth was healthy at 32% yoy in the quarter aided
by strong growth in exports courtesy of a weak INR. EBITDA at INR850m was in-line
with our estimates. Q4 is a seasonally weak quarter on margins. EBITDA margins at
12.6% in Q4 against 21.6% average in first three quarters were largely in-line though
partly impacted by higher costs related to user fees and higher staff costs.
India remains stifled, exports shine on weak rupee: India formulations grew 11% yoy
in 4QFY12 to INR2bn, 3% lower than our estimate, suffering from continuing weakness
in acute segment. The company has added another division in anti-infectives to increase
focus and attention to key brands. Export formulations grew 47% yoy during the quarter.
US contributed INR630m of sales (53% yoy) while Brazil sales contributed INR1.2bn
(28% yoy, 52% in constant currency term). Constant currency growth in the exports was
c18%. Heumann sales grew 4% yoy to INR848m while contact manufacturing revenues at
INR799m grew at healthy 25% yoy.
Turnaround in key markets and favorable currency are triggers: We believe that
while near-term upside is limited due to continued headwinds in India (which forms c40%
of sales) and higher tax outflows owing to revision in tax guidance post recent budget,
weak INR and new launches in US will benefit in next few quarters. We remain OW on
the stock, while dropping the V-flag. We have revised our model and increased our tax
assumption to 22% from 20% previously while at the same time, we built in a slower
ramp up in India in FY13. Our EPS estimates changes by -3.5% and -0.8% in FY13 and
FY14, respectively. At the current price, the stock is trading at 13.3x FY13e and 11.2x
FY14e EPS. We expect the US to turn materially profitable in FY13 given couple of
interesting opportunities including escitalopram oxalate, montelukast chewable tablets in
later part of the year. Our target price of INR715 is based on 13x Mar-14 EPS of INR55.
Key risks in our view remain sluggish growth of domestic formulation business and
slowdown in Brazil growth.


Conference call highlights
1 India formulations: Domestic sales remain weak in 4QFY12 with 11% yoy growth due to
continued weakness in acute therapy segment (Torrent grew 9% vs covered market growth of 14%
in acute segment). Chronic therapies, which constitute c60% domestic formulation sales grew inline
with market. Sales force count stands at 3,700 at the end of Q4.
2 US business: TRP has seen higher regulatory filings expenses levied on pending ANDA, new
ANDA filings and maintenance of facilities. The company filed one ANDA during the quarter
taking cumulative ANDAs pending FDA approval to 27 in the US, so far it has 37 ANDA approvals
of which 22 products have been commercialized. TRP expects to launch five to six new products in
the US in FY13.
3 Brazil: 1) During Q4FY12, TRP grew 52% in constant currency term with volume growth of 32%,
new products contribution of 17% and price de-growth of 2%. TRP expects growth in Brazilian sales
to remain c15% level. 2) regulatory approvals timings in Brazil have gone up to 24-30 months from
earlier 12 months periods. TRP has launched one new product during the quarter taking the cumulative
number of products in the market to 30. In FY13, it expects to launch three to four new products.
4 Heumann: Sales grew 4% yoy (Euro sales growth of 8%) during the quarter and five new have
been launched.
5 Mexico: Sales were INR45m during Q4FY12 vs. INR19m in same quarter previous year; Torrent
has sales force of 35 who covers 70% of Mexican market. TRP has plans to enter the cardiovascular
segment from next year. Plans to grow product portfolio from the current five products to 30
products in four years with field force of 200 people.
6 RoW market: TRP plans to enter semi-regulated market like Thailand and ramp up sales force in
existing markets like Sri Lanka, Vietnam, Myanmar, Philippines etc. Also, it is scaling up its
operations in markets like Australia and South Africa.
7 Dossier income in 4QFY12 was INR115m (INR480m in FY12). TRP doesn’t expect dossier
income to remain at these levels in coming period.
8 GPC Cayman investment: TRP has invested cINR400m in GPC Cayman investment, which sells
medicines in the US, TRP has taken 6% stake in the company.
9 R&D expenses for Q4 and full year FY12 remain at c5% of net consolidated sales and similar level
of expenses are expected in coming periods.
10 TRP has seen margin contraction of 1% due to increasing in marketing expenses and overheads at
Sikkim facility, 1% contraction due to DPEB (Duty Entitlement Pass Book) roll back, 1% due to
increase in FDA user fee for ANDA applications in the US and 0.7% margin drop due to
revaluation of pension liabilities for its Heumann business pension liabilities (current pension
liabilities of cEuro6mn) during Q4FY12.
11 Hedging: TRP has hedged c70% of FY13 sales (cUSD190m hedge position) at INR53.36 and
c90% loans.


12 Forex loss: TRP has booked foreign loss of cINR30m in other expenses in 4QFY12.
13 Capex for FY12 was INR1.8bn and for FY13 the company expects it be in INR2.3-2.5bn range.
Gross debt on book was INR5bn


Valuation and risks
We value the stock at 13x (unchanged) FY-14 EPS of INR55 to derive our TP of INR715 (previously
INR680). We believe the valuation multiple of 13x is justified in view of peers trading at similar multiple.
We believe that while near-term upside is limited due to continued headwinds in India (which forms
c40% of sales) and higher tax outflow owing to revision in tax guidance post recent budget, weak INR
and new launches in US will benefit in next few quarters. We maintain our OW rating on the stock, but
now we remove the volatility indicator on this rating. Volatility ratings are defined as stocks having
historical volatility (defined as the past month’s average of the daily 365-day moving average volatilities)
of over 40%. As at 21 May 2012, Torrent Pharma scored 22.53%, hence it is indicated as non-volatile.
Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and
below the hurdle rate for India stocks of 11%. Our TP of INR715 implies a potential return of 17%
including dividend yield. Potential return equals the percentage difference between the current share price
and the target price, including the forecast dividend yield when indicated.
Key risks in our view remain sluggish growth of domestic formulation business and slow down in
Brazil growth.