Torrent Pharmaceuticals- Performance In Line; Recovery In Margins A Positive ::Nirmal bang,

Performance In Line; Recovery In Margins A Positive
Torrent Pharmaceuticals’ (TPL) 1QFY13 earnings were in line with our as well as consensus estimates and reinforces our confidence on the stock’s re-rating as two of its most important drivers – recovery in domestic business (highest growth in the past six quarters) and improvement in margins – stand validated. We continue to differ from consensus estimates and believe TPL’s base business margins would improve over the next two years on improving profitability of its US business (which turned profitable in 1QFY13), higher capacity utilisation at its Sikkim facility and greater revenue contribution from India and Brazil (two of its most profitable markets). The stock’s valuation at 12x FY14E EPS of Rs51 is still at a steep discount to peers/historical average and does not fully capture the company’s robust growth profile and strong balance sheet as well as return ratios. We retain our FY13E/FY14E estimates, but following the recent surge in the stock, we downgrade our rating to Hold from Buy.

��

Revenue growth stays healthy: 1QFY13 revenue growth of 18%YoY - in line with our/consensus estimates - was healthy, led by strong performance in the US (up 88%YoY; rupee depreciation, new product launches), Brazil (up 28% YoY, 65% YoY adjusting for deferred revenue in 1QFY12) and India (up 14%YoY; low base, pick-up in gastrointestinal segment and strong growth in chronic therapies). Contract manufacturing (lower insulin off-take by Novo Nordisk) and Heumann (supply constraints) reported a decline in growth. The company got Rs150mn as dossier income from its partners. Operating performance hurt by forex losses, higher tax: Improvement in gross margins (up 157bps YoY, 436bps QoQ largely led by currency depreciation), was negated by realised forex losses of Rs247mn. Consequently, EBITDA margin stood at 20.3% - broadly in line with our/consensus estimates – while a higher tax rate (at 27% versus 22% in 1QFY12 and 3% in 4QFY12) resulted in PAT of Rs1.02bn, in line with our/consensus expectations. We maintain our stance on improvement in margins and factor in a 250bps growth in margins over FY12-14E. Other con-call updates: a) Revenue fully hedged at USD/INR rate of Rs53.5/$, b) TPL expects to launch eight products in the US in the 9MFY13 period, c) It has launched three products in Brazil and has regulatory approval for a couple of more products, d) TPL’s forex debt stands at US$70-80mn, and e) Plans capex of Rs2.25-2.50bn in FY13E/ FY14E, respectively.