BSE SENSEX S&P CNX 21,338 6,339 Bloomberg TRP IN Equity Shares (m) 169.2 M.Cap. (INR b) / (USD b) 80.4/1.3 52-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 31.7 31.7 38.6 (INR) Gr (%) 14 0 22 BV/Sh(INR) 108 129 154 RoE (%) 32.9 26.8 27.3 RoCE (%) 30.5 22.9 20.6 P/E (x) 16.0 16.0 13.2 P/BV (X) 4.7 3.9 3.3 22 January 2014 3QFY14 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);+91 22 3982 5584 Hardick Bora(Hardick.Bora@MotilalOswal.com);+91 22 3982 5423 Investors are advised to refer through disclosures made at the end of the Research Report.
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 2,586 14.9 2,970 0.0 International 6,390 4,490 42.3 5,720 11.7 Latam 1,480 1,170 26.5 1,250 18.4 USA 1,480 920 60.9 1,150 28.7 Europe (Incl-Germany) 2,480 1,560 59.0 2,350 5.5 RoW, Russia & CIS 950 780 21.8 970-2.1 Contract Mfg 540 750-28.0 1,000-46.0 Others 250 160 56.3 230 8.7 Total 10,150 7,986 27.1 9,920 2.3 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 2014 2
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 20-25 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 2014 3
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 3QFY13. 22 January 2014 4
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 38,422 3 48,167 47,729 1 56,436 56,211 0 EBITDA 7,864 7,223 9 9,865 9,632 2 11,931 11,602 3 Net Profit 5,364 4,956 8 5,371 5,192 3 6,528 6,234 5 EPS (INR) 31.7 29.3 8 31.7 30.7 3 38.6 36.8 5 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 2014 5
: 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 16.0 20.6 18.8 FY15E 16.0 16.4 15.7 P/BV (x) FY14E 4.7 4.2 4.7 FY15E 3.9 3.5 3.8 EV/Sales (x) FY14E 2.2 2.7 2.6 FY15E 2.2 2.2 2.2 EV/EBITDA (x) FY14E 10.9 13.3 12.2 FY15E 10.7 11.2 10.2 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY14 31.7 30.4 4.2 FY15 31.7 34.4-8.0 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 508 580 14.2 Buy Shareholding pattern (%) Dec-13 Sep-13 Dec-12 Promoter 71.5 71.5 71.5 Stock performance (1-year) Domestic Inst 8.1 8.9 9.7 Foreign 10.7 8.1 7.2 Others 9.7 11.5 11.6 22 January 2014 6
Financials and valuation Income statement (INR Million) Y/E March 2013 2014E 2015E 2016E Net Sales 30,540 38,516 47,167 55,436 Change (%) 18 26 22 18 EBITDA 6,930 7,864 9,865 11,931 EBITDA Margin (%) 21.6 19.9 20.5 21.1 Depreciation 830 898 1,753 2,126 EBIT 6,100 6,966 8,111 9,805 Interest 340 539 1,630 1,822 Other Income 430 450 495 495 Extraordinary items 370-260 0 0 PBT 5,820 7,137 6,976 8,477 Tax 1,470 1,513 1,604 1,950 Tax Rate (%) 25.3 21.2 23.0 23.0 Min. Int. & Assoc. Share -20 0 0 0 Reported PAT 4,350 5,624 5,371 6,528 Adjusted PAT 4,705 5,364 5,371 6,528 Change (%) 43 14 0 22 Margins (%) 15 14 11 12 Balance sheet (INR Million) Y/E March 2013 2014E 2015E 2016E Share Capital 423 846 846 846 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 258 369 369 369 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 605 605 605 605 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 2013 2014E 2015E 2016E Basic (INR) EPS 27.8 31.7 31.7 38.6 Cash EPS 30.5 38.5 42.1 51.1 Book Value 84.9 108.0 128.6 153.6 DPS 23.0 9.5 9.5 11.6 Valuation (x) Payout (incl. Div. Tax.) 21.7 15.1 14.2 12.3 Valuation(x) 19.5 13.8 12.0 10.5 P/E 6.0 5.0 3.9 3.2 Cash P/E 15.6 12.3 11.3 9.3 Price / Book Value 5.6 4.4 3.7 3.1 EV/Sales 2.5 2.0 2.1 1.7 Profitability Ratios (%) EV/EBITDA 11.7 10.2 10.1 8.2 Dividend Yield (%) 4.8 2.0 2.0 2.4 Profitability Ratios (%) RoE 35.8 32.9 26.8 27.3 RoCE 33.5 30.5 22.9 20.6 Turnover Ratios (%) Asset Turnover (x) 1.5 1.4 1.0 1.1 Cash flow statement (INR Million) Y/E March 2013 2014E 2015E 2016E OP/(Loss) before Tax 6,930 7,864 9,865 11,931 Depreciation 0 0 0 0 Others 430 450 495 495 Interest 0 0 0 0 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 636 0 0 0 Others 0 0 0 0 CF from Inv. Activity -2,241-2,554-22,738-2,744 Inc/(Dec) in Net Worth 0 423 0 0 Inc / (Dec) in Debt 1,112 2,101 17,000 0 Interest Paid -340-539 -1,630-1,822 Divd Paid (incl Tax) -2,273-1,883-1,885-2,291 CF from Fin. Activity -1,146-98 13,484-4,113 Inc/(Dec) in Cash -473 3,291-2,900 2,490 Add: Opening Balance 6,743 6,270 9,501 6,601 Closing Balance 6,270 9,501 6,601 9,091 22 January 2014 7
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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 Email : anosh.koppikar@motilaloswal.com Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189232 Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 04931 Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 22 January 2014 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 8