Strong domestic outlook remains key growth driver for Torrent Pharma

Cost savings could drive Torrent Pharma's margins higher in the near term

After a healthy performance in the March quarter (Q4), expectations of margin expansion and continued outperformance in the Indian and Brazilian markets are positives for Torrent Pharmaceutic­als. The stock of India’s fifth-lar­gest pharma company by market capitalisation has risen over 10 per cent since its lows in May.

Ambit Capital recently upgraded the stock on expectations of recovery in Indian chronic therapy sales, tangible progress on cost optimisation, and lower drag from the troubled US and German businesses, besides more reasonable valuations.

The near-term trigger is the improvement in operating profit margins in the current financial year. After reporting a 372-basis-point fall in margins in Q4 to 26.3 per cent, the company has indicated that there could be an improvement in the coming quarters.

It believes that margins will rise at least 300 basis points sequentially in Q1FY23. Most of the gains are expected to be driven by cost saving from the discontinued liquid plant in the US, which will account for half the margin gains.

The company, which acquired the plant in 2018 for about Rs 450 crore, was incurring an annual cost of Rs 135 crore. It took an impairment charge of Rs 485 crore in Q4 related to the tangible assets at the site.

Says Saion Mukherjee of Nomura Research, “The decision to discontinue operations at the site is surprising to us given the investments the company made in the recent past. However, we think it is prudent to discontinue and cut losses given commercial unviability as assessed by the company.”

The other profitability gains are expected to come from plant optimisation and 7-8 per cent price increases in branded generics. The company has guided for an improvement despite the cost inflation in raw materials and higher logistics expenses.
 

The firm’s outperformance in the Indian market is another trigger. Price increases and new launches in the domestic market, which saw a 12 per cent year-on-year (YoY) growth in Q4, are expected to help the company outperform peers. In May, the company posted 14.5 per cent growth in the market. This is the fourth consecutive quarter of outperformance for the drug maker. The growth was led by vitamins, pain and gastrointestinal medications. Expansion of its field force, market share gains and traction in the trade generics segment could drive incremental gains in the domestic business.

Among international markets, Brazil was the biggest outperformer, registering a growth of 33 per cent YoY. The growth was led by five new launches including the anticoagulant Rivaroxaban. Expected healthy growth in the existing portfolio, likely relative outperformance, and new product launches are expected to drive Brazilian sales growth, believes Sharekhan Research. Sales in Germany were below expectation due to the loss of tenders in Q3.

Despite the mid-teen price erosion in the US market YoY, the business saw some recovery (up 5 per cent YoY) due to the launch of an antibiotic Dapsone. The company has filed six abbreviated new drug applications (ANDAs) taking the total to 57 ANDAs. Higher competitive intensity, lack of product launches and re-inspection delays by the US Food and Drug Administration are the key risks for the US business. While Sharekhan has a ‘buy’ rating, analysts at JM Financial have a ‘hold’ rating.

“While most of the earnings traction is expected H2FY23 onwards, we maintain our stand till the resolution of site issues with the US FDA, new tender wins in Germany and key domestic launches come into play. The aforementioned factors indicate moderate earnings growth over the next few quarters despite factoring margin expansion,” believes JM Financial.

At the current price, the stock is trading at 27 times its FY24 earnings estimates and could be looked at on dips.