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Torrent Pharma1
Torrent Pharmaceuticals’ (Torrent) Q3FY08 results were above our expectations, with3.6% and 52.5% Y-o-Y growth in sales and EBITDA, respectively. The company reportednet profit of INR 373 mn compared to a profit of INR 257 mn in the corresponding quarterof the previous year.Cost management was the theme for the quarter, which helped offset the impact of alower topline growth. Even though topline growth was lower-than-expected, the companymanaged to grow its EBITDA by 52.5% to ~INR 609 mn.We believe the company’s EPS is likely to grow at a rate of ~24% over the next two years,driven by margin expansion from product rationalization, focus on a few markets, andefforts to improve net realizations in the domestic market. The stock price has correctedby ~ 14% in the previous quarter. At CMP of INR 162, the stock is trading at a PE of 11.1xand 9.6x on our FY08E and FY09E earnings, respectively. We maintain our ‘BUY’recommendation on the stock.Domestic market: Margins improve through cost maintenance measures
Torrent’s domestic formulations sales were flat at ~INR 1,430 mn in Q3FY08. Lowernumber of new product introductions and higher-than-anticipated attrition led to mutedtopline growth. We expect domestic formulations to grow by 10% in FY08E. The companyfocused on cost cutting measures in the quarter, which clearly manifested throughimprovement in margins. Margin for the quarter for the domestic business was ~ 27%.
Heumann: Manpower pared
Heumann reported sales of ~INR 500 mn in the quarter. Reduction of manpower inGerman operations has contributed a large chunk to the reduction in the salaries andwages item in the quarter. In the previous year, Heumann had incurred a 15-20% loss atthe EBIT level. The losses, however, are likely to reduce in FY08E, with significant reductionin manufacturing costs, as the company shifts production to India. The company targets totransfer production of ~30 products to India by 2008, which will save ~3-6% of its marginat the EBIT level. We expect Heumann to incur 10% EBIT loss in FY08E.
February 5, 2008
Ranjan Varghese
+91-22-4019 4984ranjan.varghese@edelcap.com
Amod Karanjikar
+91-22-2286 4429amod,karanjikar@edelcap.comReuters : TORP.BOBloomberg : TRP IN
Market Data
52-week range (INR) : 272 / 173Share in issue (mn) : 72.5M cap (INR bn/USD mn) : 8.5 / 217.0 Avg. Daily Vol. BSE/NSE (‘000) : 92.7
Share Holding Pattern (%)
Promoters : 67.6MFs, FIs & Banks : 1.4FIIs : 10.6Others : 20.4
India Equity Research | Pharmaceuticals Result Update
T
ORRENT
P
HARMACEUTICALS
INR
162
Cost management does the trick
BUY
Edelweiss Research is also available on Bloomberg EDEL <GO> and Thomson First Call.
FinancialsYear to MarchQ3FY08Q3FY07
% change
Q2FY08
% change
FY07FY08E
Revenues (INR mn)3,4783,359
3.5
3,471
0.2
12,98814,155 EBITDA (INR mn)609400
52.5
459
32.7
1,5572,036 Net profit (INR mn)373257
45.3
262
42.3
9351,241 EPS (INR)4.43.0
45.3
3.1
42.3
11.114.7 P/E (x)14.711.1 EV/EBITDA (x)10.17.7
Torrent Pharma2
Brazil: To drive growth
Revenue from Torrent’s Brazilian operations increased by 11% to ~INR 584 mn in Q3FY08. Thecompany had invested in field force expansion to cover a larger part of the country, whichresulted in subdued margins in FY07. However, now that Torrent covers entire Brazil, marginsare likely to improve.. We expect Brazilian sales to grow ~14% in FY08E.
Margins expected to expand in next few quarters
Torrent’s profitability had taken a major hit after Heumann acquisition in June 2005. Its otherbusinesses in Brazil and Russia were also making losses until H1FY07. However, since Q3FY07,all the businesses (except Heumann) are generating profits. We are hopeful that the company’sdecision of transferring manufacturing of most products to India will aid margin improvement atHeumann.Gross margin improved to 65.7% in the quarter, riding on a better product mix and shifting of manufacturing of products (for Heumann) from Germany to India. Torrent, in Q3FY08, hasmanaged to improve margins through management of various components of the cost structure.EBITDA margin improved by 560bps to 17.5% on account of reduction of manpower inGermany and a tighter control on SG&A in the domestic market.Overall, we expect Torrent’s EBITDA margins to expand from 12.0% in FY07 to 14.5% inFY09E. This, coupled with estimated sales CAGR of 11.3% over FY07–09, is likely to translateinto EBITDA CAGR of 22.5% and EPS CAGR of 24.0%.
Outlook and valuations: Margins likely to improve; maintain ‘BUY’
The company is focusing on cost cutting across its operations and geographies. We expectmargin expansion in the near term and consider Torrent to be a sustainable growth story. Withimprovement in the company’s overall performance, its RoCE is also likely to improve from17.6% in FY07 to 20.3% in FY09E. The company’s stock price has been under pressure in theprevious quarter and has corrected by ~14% (with September 28, 2007 as the base price). AtCMP of INR 162, the stock is trading at a PE of 11.1x and 9.6x our FY08E and FY09E earnings,respectively, which is attractive compared with peers. With improvement in sales growth,margin, and return ratios, we maintain our
‘BUY’
recommendation on the stock.
Torrent Pharma3
Financial snapshot(INR mn)Year to MarchQ3FY08Q3FY07
Growth (%)
Q2FY08
Growth (%)
FY07FY08EFY 09E
Total operating income 3,478 3,359
3.5
3,471
0.2
12,988 14,155 16,102Gross Sales 3,457 3,336
3.6
3,400
1.7
12,916 14,155 16,102Less: Excise duty 68 66
2.9
58
17.6
283
Net sales
3,389 3,270
3.6
3,343
1.4
12,633 14,155 16,102
Other operating income
89 89 128 355 - - Total expenses 2,869 2,960
(3.1)
3,012
(4.8)
11,431 12,119 13,765Cost of goods sold 1,192 1,244
(4.2)
1,208
(1.3)
4,485 4,459 5,040Materials cons. (with invent. adjust) 1,009 685
47.4
718
40.6
2,332 3,893 4,396Purchase of traded goods 182 559
(67.4)
490
(62.8)
2,153 566 644Gross profit 2,286 2,116
8.0
2,263
1.0
8,503 9,696 11,062Other expenses 1,677 1,716
(2.3)
1,804
(7.0)
5,328 5,688 6,520Salaries, wages, other payments 567 607
(6.6)
597
(5.0)
2,488 2,704 3,042R&D 227 188
20.8
267
(14.9)
770 708 918Other expenses 883 921
(4.2)
940
(6.1)
2,069 2,276 2,561EBITDA 609 400
52.5
459
32.7
1,557 2,036 2,336Other income 7 16
(57.9)
8 24 24 24PBDIT 616 416
48.2
467
31.9
1,581 2,059 2,360Depreciation and ammortization 89 87
2.8
91
(2.3)
329 377 434Interest 51 68
(25.3)
49
3.7
162 222 235PBT 476 261
82.4
327
45.6
1,090 1,460 1,690 Tax(including deferred tax) 104 5
2104.3
65
58.9
155 219 254PAT 373 257
45.3
262
42.3
935 1,241 1,437Net profit 373 257
45.3
262
42.3
935 1,241 1,437Equity capital (FV INR10)423.0423.0423.0423.1 423.1 423.1Dividend including dividend tax289.4 283.8 283.8Number of shares (mn)84.684.684.684.6 84.6 84.6EPS (INR)4.43.0
45.3
3.1
42.3
11.114.717.0 Annualized PE (x)14.7 11.1 9.6 Annualized EV/EBIDTA (x)10.17.76.7 Annualized M. cap / Revenues (x)1.11.00.9
as % of net revenues
COGS34.337.034.834.531.531.3
Other expenses48.251.152.041.040.240.5
Other income0.20.50.20.20.20.1
Total expenses82.588.186.888.085.685.5
Depreciation2.62.62.62.52.72.7
Gross profit65.763.065.265.568.568.7
EBITDA17.511.913.212.014.414.5
Net profit10.77.67.57.28.88.9
Dividend payout---27.120.417.7
Tax rate21.81.819.914.215.015.0
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