Torrent Pharmaceuticals

Transcription

1 BSE SENSEX S&P CNX 21,338 6,339 Bloomberg TRP IN Equity Shares (m) M.Cap. (INR b) / (USD b) 80.4/ Week Range (INR) 535/324 1, 6, 12 Rel.Per (%) 4/12/32 Financials & Valuation (INR Million) Y/E MAR 2014E 2015E 2016E Net Sales 38,516 47,167 55,436 EBITDA 7,864 9,865 11,931 Adj PAT 5,364 5,371 6,528 Adj.EPS (INR) Gr (%) BV/Sh(INR) RoE (%) RoCE (%) P/E (x) P/BV (X) January QFY14 Results Update Sector: Healthcare Torrent Pharmaceuticals CMP: INR508 TP: INR580 Buy Revenue for 3QFY14 grew 27% YoY to INR10.1b (v/s est. INR9.72b). EBITDA grew 33% YoY to INR2.1b (v/s est. of INR1.83b), with EBITDA margin at 21.2% (est. 18.8%). Adjusted PAT grew 41% to INR1.6b (above est. of INR1.26b). Sales growth was driven by stronger-than-expected growth in key export markets of the US (up 61% YoY v/s est. 33%), Latam (up 26% YoY v/s est. 9%) and Europe (up 59% YoY v/s est. 46%). Growth in domestic formulations (15% YoY) was in line, while RoW markets grew below expectation (up 9% YoY v/s est. 27%). EBITDA margin expanded 100bp YoY to 21.2% (v/s est. 18.8%). This was on account of: (1) higher-than-expected contribution from gcymbalta in the US, (2) surprising recovery in sales growth in Brazil and (3) rationalization of marketing expenses. Concall highlights: (1) India: Sustains growth momentum led by improving MR productivity, (2) Brazil: recent launches drive growth; increasing focus on genericgenerics, (3) US: high growth to sustain driven by 8-10 launches in FY15 and (4) Europe: high growth to sustain due to contribution from long term tenders. Based on 3QFY14 performance, we have increased the EPS estimate for FY14E/15E/16E by 8%/3%/5% mainly to reflect (1) higher growth in the US, Brazil and Europe along with (2) improving field force productivity and sales mix driving margin expansion. Performance over the last few quarters suggests that the base business is becoming increasingly stable. However, FY15 will be the first year of consolidation of Elder Pharma s acquisition which is expected to be a drag on profitability due to higher interest cost. While FY15 is likely to be a muted year, we expect Elder s acquisition to start reflecting positively in FY16 and this along with stability in base business is likely to lead to a strong 20% growth in earnings in FY16E. Maintain Buy with a revised target price of INR580 (15x FY16E EPS). Alok Dalal(Alok.Dalal@MotilalOswal.com); Hardick Bora(Hardick.Bora@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Revenue growth driven by surprise in US, Brazil and Europe Revenue grew 27% YoY to INR10.1b (v/s est. INR9.72b), led by 42% YoY growth in export formulations. Growth was stronger than expected growth in US (up 61% YoY v/s est 33%), LatAm (up 26% YoY v/s est 9%) and Europe (up 59% YoY v/s est 46%). Domestic formulations grew in line, while RoW markets grew below expectation (up 9% YoY v/s est 27%). Geographical sales mix (INR m) Particulars 3QFY14 3QFY13 % YoY 2QFY14 % QoQ Domestic Formulations 2,970 2, , International 6,390 4, , Latam 1,480 1, , USA 1, , Europe (Incl-Germany) 2,480 1, , RoW, Russia & CIS Contract Mfg , Others Total 10,150 7, , Source: Company, MOSL EBITDA outperformance due to better sales mix, Brazil recovery EBITDA grew 33% YoY to INR2.15b (above est. of INR1.83b), while EBITDA margins expanded 100bp YoY to 20.2% (est. 18.8%). Adjusted PAT grew 41% to INR1.58b (above est. INR1.26b). EBITDA margin expansion was led by (1) higher-than-expected contribution in gcymbalta in US, (2) recovery in high-margin Brazil formulations and (3) rationalization of marketing costs. Margins expansion was restricted by (1) forex loss of INR200m and (2) higher contribution from low-margin Heumann sales. EBITDA and margin trend Source: MOSL, Company 22 January

3 Key takeaways from concall India formulations Growth was at 15% YoY (v/s est. of 11%) against a 5% growth in covered market. Management indicated that the revival in the growth is outcome of corrective actions taken by the management in the business over last 5-6 quarters. As a part of the exercise to improve productivity, TRP has rationalized its field force. Its strength has reduced from 3,800 to 3,600 so far in FY14. Despite this, the domestic formulations business has grown 12% in 9MFY14 in a period when market witnessed slowdown from the pricing policy implementation. The management indicated that it has resolved the conflicts with the trade channels. With the acquisition of Elder Pharma s brands (expected to conclude in 2 months), the company will now be consolidating its entry into new geographies as well as therapeutic segments like Gynecology, Orthopedics and Woman Health. The management is confident of capitalizing on Elder s established marketing strength to better promote its own products. Brazil Recorded growth of 26% in INR terms (v/s est. of 9%) led by rising contribution from recently launched (1) Nebivolol in the branded generic space and (2) 7 to 8 products in the generic-generic space. Growth in constant currency terms was a strong 22%. Apart from the new launches, growth has picked in the existing business with increasing field force productivity. TRP employs 325 marketing representatives in Brazil. The company is now focusing on launching generic-generic products in Brazil. The management indicated that it has a pipeline of such products which it plans to commercialize over the next 2-3 years. It currently has 6 employees in this division compared to Medley s strength of 100. The management believes that this shift in strategy could marginally impact gross margins. We have taken this into account while lowering our EBITDA estimates. We are estimating a conservative 10% growth in constant currency for TRP s Brazilian operations for FY14E, which will start normalizing to a 12% growth in FY15E/16E. Elder acquisition to help achieve scale Brazil business growth recovering Source: Company, MOSL Source: Company, MOSL 22 January

4 US Generics US formulations grew 61% YoY in INR terms led by new product launches. Growth in constant currency was 41%. Importantly, this quarter saw the benefit of gcymbalta launch, which contributed USD6m despite being in the market for 20 days in 3QFY14. Management indicated that another 6 players eligible to launch have either not entered the market or are facing capacity/supply constraints. While this has provided TRP with the opportunity to gain market share, this performance is not sustainable and will reverse once competition intensifies. The company expects to launch 8-10 new products in FY15E. It currently has 22 ANDAs pending approval with the US FDA while 46 ANDAs have already been approved (6 tentatively approved). We note that TRP does not have a very strong patent challenge strategy and hence the launch of these products will be mainly linked to relevant patent expiry. However, we believe that the incremental launches will provide benefits of operating leverage, as the company s rate & quality of ANDA filings is moreor-less constant. Europe Growth during 3QFY14 was driven by (1) high growth in Heumann on the back of tender wins. Apart from the tenders, management indicated that underlying demand has also led to the growth. Given the longer term nature of these tenders, current revenue is expected sustain over the medium term. However, we are of the opinion that margins for these markets are below TRP s overall profitability and their increasing contribution will exert pressure on EBITDA margins going forward. Commercialization of ANDA pipeline to drive US growth Europe sales revenue growth expected to sustain Source: MOSL estimates as company does not give USD revenues Source: Company, MOSL Other takeaways Tax rate for the whole year guided at 20-22%. Long-term debt on books stands at INR2b. There was a forex loss of INR200m during the quarter compared to a forex gain of INR110m in 3QFY January

5 Upgrading estimates Based on 3QFY14 performance, we have increased our sales estimate for FY14E/15E by 3%/1% mainly to reflect higher growth in Brazil and US. We have increased our FY14E/15E/16E EBITDA estimates by 9%/2%/3% mainly to reflect improvement in margins due to (1) better than expected contribution from gcymbalta in US, (2) recovery in Brazil and (3) lower staff cost due to improving productivity in India as well as Brazil. Our FY14E/15E/16E EPS estimate have consequently increased by 8%/3%/5%. Revised Forecast (INR m) FY14E FY15E FY16E Rev. Old Chg (%) Rev. Old Chg (%) Rev. Old Chg (%) Net Sales 39,516 38, ,167 47, ,436 56,211 0 EBITDA 7,864 7, ,865 9, ,931 11,602 3 Net Profit 5,364 4, ,371 5, ,528 6,234 5 EPS (INR) Valuation and view Over last 6 years, Torrent has delivered 30% EPS CAGR, even as capital employed CAGR was just 18%. It consistently improved profitability, with RoCE increasing from 14.5% in FY05 to 35.7% in FY13. Based on revised estimates, we expect 20% EBITDA CAGR over FY13-16E, led by 21% revenue CAGR. However, EPS CAGR is expected to be 12% over the same period as higher interest cost on borrowings for Elder deal and ensuing amortization costs will dent PAT growth. Despite this, its return ratios are likely to sustain well above 20% ratios, despite large intangibles on the books. Based on 3QFY14 performance, we have increased our EPS estimate for FY14E/15E/16E by 8%/3%/5% mainly to reflect (1) higher growth in US, Brazil and Europe along with (2) improving field force productivity and sales mix driving margin expansion. Performance over the last few quarters suggests that the base business is becoming increasingly stable. However, FY15 will be the first year of consolidation of Elder Pharma s acquisition which is expected to be a drag on profitability due to higher interest cost. While FY15 is likely to be a muted year, we expect Elder s acquisition to start reflecting positively in FY16 and this along with stability in base business is likely to lead to a strong 20% growth in earnings in FY16E. Maintain Buy with a revised target price of INR580 (15x FY16E EPS). 22 January

6 : an investment profile Company description Torrent Pharma is one of the second tier Pharma companies that is actively targeting the regulated generics and semi-regulate markets. The company has strong presence in domestic market with focus and leadership in CVS and CNS segments. The company has large presence in some of the key global markets like Brazil and Germany while it is expanding its footprint in key markets like US, Europe (excl. Germany) and RoW. Key investment arguments Torrent derives its strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments like CVS and CNS In International business, it will grow profitable on the back of presence in both generic and branded markets. The company has consistently delivered improving financial performance, with increase in RoCE & RoE Torrent's net debt-equity ratio has come down from 0.7x in FY07 to zero since FY11. Recent developments Launched gcymbalta with shared exclusivity Acquired part of Elder Pharma s domestic formulations business for INR20b. Torrent Pharmaceuticals Key investment risks Regulatory risk related to product approvals, manufacturing cost and various laws across business segments Foreign exchange risk as around 50% revenues of the company come from the export markets. Valuation and view Over last 6 years, Torrent has delivered 30% EPS CAGR, even as capital employed CAGR was just 18%. It consistently improved profitability, with RoCE increasing from 14.5% in FY05 to 35.7% in FY13. The stock trades at 16.0x FY15E and 13.2x FY16E EPS. Maintain Buy with target price of INR580 (15x FY16E EPS). Sector view Regulated markets would remain the key sales and profit drivers in the medium term. Japan is expected to emerge as the next growth driver, particularly for companies with a direct marketing presence. We are overweight on companies that are towards the end of the investment phase, with benefits expected to start coming in from the next fiscal. Comparative valuations Torrent Glenmark Cadila Pharma Pharma Healthcare P/E (x) FY14E FY15E P/BV (x) FY14E FY15E EV/Sales (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Shareholding pattern (%) Dec-13 Sep-13 Dec-12 Promoter Stock performance (1-year) Domestic Inst Foreign Others January

7 Financials and valuation Income statement (INR Million) Y/E March E 2015E 2016E Net Sales 30,540 38,516 47,167 55,436 Change (%) EBITDA 6,930 7,864 9,865 11,931 EBITDA Margin (%) Depreciation ,753 2,126 EBIT 6,100 6,966 8,111 9,805 Interest ,630 1,822 Other Income Extraordinary items PBT 5,820 7,137 6,976 8,477 Tax 1,470 1,513 1,604 1,950 Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 4,350 5,624 5,371 6,528 Adjusted PAT 4,705 5,364 5,371 6,528 Change (%) Margins (%) Balance sheet (INR Million) Y/E March E 2015E 2016E Share Capital Reserves 13,947 17,429 20,915 25,151 Net Worth 14,371 18,275 21,761 25,997 Debt 6,930 9,031 26,031 26,031 Deferred Tax Total Capital Employed 21,561 27,678 48,164 52,401 Gross Fixed Assets 14,960 17,560 40,322 43,078 Less: Acc Depreciation 4,852 5,750 7,503 9,629 Net Fixed Assets 10,108 11,811 32,819 33,449 Capital WIP 1,094 1,047 1,023 1,012 Investments Current Assets 25,861 29,707 31,820 38,256 Inventory 9,239 8,085 10,900 12,689 Debtors 6,878 8,298 10,115 11,852 Cash & Bank 6,270 9,501 6,601 9,091 Loans & Adv, Others 3,475 3,822 4,204 4,625 Curr Liabs & Provns 16,107 15,491 18,104 20,921 Curr. Liabilities 12,387 11,913 14,514 16,891 Provisions 3,720 3,578 3,590 4,030 Net Current Assets 9,755 14,216 13,716 17,335 Total Assets 21,561 27,679 48,164 52,401 E: MOSL Estimates Ratios Y/E March E 2015E 2016E Basic (INR) EPS Cash EPS Book Value DPS Valuation (x) Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales Profitability Ratios (%) EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Asset Turnover (x) Cash flow statement (INR Million) Y/E March E 2015E 2016E OP/(Loss) before Tax 6,930 7,864 9,865 11,931 Depreciation Others Interest Direct Taxes Paid -1,727-1,401-1,604-1,950 (Inc)/Dec in Wkg Cap -2,349-1,230-2,401-1,128 CF from Op. Activity 2,914 5,942 6,354 9,347 (Inc)/Dec in FA & CWIP -2,876-2,554-22,738-2,744 (Pur)/Sale of Invt Others CF from Inv. Activity -2,241-2,554-22,738-2,744 Inc/(Dec) in Net Worth Inc / (Dec) in Debt 1,112 2,101 17,000 0 Interest Paid ,630-1,822 Divd Paid (incl Tax) -2,273-1,883-1,885-2,291 CF from Fin. Activity -1, ,484-4,113 Inc/(Dec) in Cash ,291-2,900 2,490 Add: Opening Balance 6,743 6,270 9,501 6,601 Closing Balance 6,270 9,501 6,601 9, January

8 Disclosures Torrent Pharmaceuticals This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement TORRENT PHARMACEUTICALS LTD 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.K. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered brokerdealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran anosh.koppikar@motilaloswal.com kadambari.balachandran@motilaloswal.com Contact: (+65) Contact: (+65) / Office address: 21 (Suite 31), 16 Collyer Quay, Singapore Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai January 2014 Phone: reports@motilaloswal.com 8