Torrent Pharma, Brazil, key to recovery:: Business Line

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Investors can continue to hold the stock of Torrent Pharma. Despite growth hurdles in its key Brazilian market, stability in the domestic business and reasonable valuations may support the stock price in the medium term. At the current market price of Rs 686, the stock trades at 12.5 times its FY14 earnings, at the lower end of its historical trading band.

DOMESTIC MARKET LOOKS UP

Domestic formulation business accounts for over a third of Torrent’s revenues. Despite lagging the industry in FY12, the segment’s performance has been improving in the last nine months.

The company’s India formulations business posted 13.4 per cent growth for the nine month period ended December 2012 compared with the same period last year.

Scale up in new therapy areas such as anti-cancer and wider reach with additional field force enabled this. Currently, almost 3,900 representatives promote Torrent’s brands with doctors in India. Chronic drugs catering to diabetes, cardiovascular and neuropsychiatry disorders account for nearly two thirds of the company’s domestic revenues.

Torrent currently commands a 1.7 per cent share in the domestic market, marginally higher than in the previous year. Though it managed to scale up market share in specific therapies, it did lose share in others.

For instance, there has been a steady rise in market share for cardiovascular, anti-diabetes, vitamins and anti-cancer in the last one year. However, Torrent lost its share in neuropsychiatry, anti-infectives and anti-malarials to competition during the same period.

With focus on improving field force productivity and ramp-up in new segments such as anti-cancer and pain, domestic business may continue to grow at a healthy pace but for any adverse changes in the pricing policy.

BRAZIL MARKET IN A FLUX

Next to India, Brazil is an important market for Torrent given the healthy margins in this geography. The company earns almost 15 per cent of its revenues from this market.

Even as Brazilian revenues grew at a healthy pace over the last two years, it has witnessed an unprecedented slowdown in the last two quarters. Lower contribution from Brazil impacted the company’s overall margins in the current fiscal.

Delay in new product approvals due to strike by employees of the Brazilian regulatory agency (ANVISA) hampered growth in this market. Further, adverse currency movements also ate into the company’s revenues and profits.

The Brazilian Government-sponsored reimbursement programme, which was part of the present Government’s electoral promise, has added to the pressure.

While Torrent was prudent in staying away from supplying drugs to the low-margin government-sponsored programme, availability of cheaper alternatives has impacted the demand for its select drugs.

Thanks to the government programme, even as the overall market grew at an impressive double-digit level, Torrent’s growth remained lacklustre at mid single-digit levels. For instance, during the December quarter, the market grew 21 per cent, compared with 7 per cent growth for Torrent.

While new product approvals are gathering momentum with the cessation of strike by ANVISA employees, pressure due to the reimbursement programme may impede growth in the near term.

However, barring any adverse currency movement, growth in the Brazilian market may stabilise at low double-digit levels in the medium term. This is a scale down from the erstwhile expectation of healthy double-digit growth.

US GROWING

Though a late entrant, Torrent is gradually scaling presence in the US market. Recent generic drug launches such as anti-depressant, Lexapro, and anti-asthma, Singulair, have bolstered growth in this market.

The US geography currently accounts for over 12 per cent of the company’s revenues. Given the low base and a decent pipeline, this business may continue to grow at a healthy pace in the medium term.

Heumann, Torrent’s German subsidiary, has gathered steam in the last two quarters, thanks to new tenders won by the company.

Revenue flow from new orders helped in arresting the slide in the current fiscal. But, given the low-margin nature of the tender business, faster growth from this segment may drag the overall margins.

To address this, Heumann is in the process of shifting manufacturing base to India. But the improvement may be a gradual process and margins may remain under pressure in the near term.

Contribution from other markets — the UK and Romania — should support the company’s revenues. Torrent has managed steady growth in other markets such as Russia and CIS.

Contract manufacturing business contributes nearly 10 per cent to the company’s revenues. Insulin supplies to global major Novo Nordisk constitute a chunk of this business.

Despite Novo being the leader, volume growth has been lacklustre, given the stiff competition from domestic players such as Biocon and Wockhardt. Further, an unfavourable insulin pricing policy may have a bearing on Torrent’s revenues and profits.

But, given the limited contribution of the segment to the company’s revenues and profits, this may not risk Torrent’s growth in a material way.

Torrent posted revenue growth in excess of 16 per cent during the nine month period ended December 2012. Operating margins declined by 0.4 percentage points to 20.2 per cent during this period, due to inferior sales mix. Despite higher tax outgo, net profit adjusted for forex impact grew 15 per cent.

Though stability in India formulations will support margins, sustainable recovery in the Brazilian operations will determine stock performance.