Why Torrent Pharma Is Outperforming Its Larger Indian Peers

Shares of Torrent Pharma Ltd. have risen the most among large domestic peers so far this year as its domestic business aided earnings when Indian drugmakers face pricing pressure in the U.S., the largest market for many of them.

The stock has gained over 33 percent since the start of the financial year in April, compared with a 10.6 percent rise in the S&P BSE Healthcare Index. It has jumped over 17 percent so far this year—the most among large domestic peers—and is closet to its all-time high.

The recent rally was aided by its first-quarter earnings. The revenue of India's ninth largest pharma company by market value jumped 37 percent year-on-year in the quarter ended June, with an even better operating profit growth of 60 percent. Profit margin rebounded, but net profit was lower than a year ago because of higher other income in the base quarter.

The November acquisition of Unichem Laboratories Ltd. contributed to Torrent Pharma's domestic business. And the company also expects the international segment to improve.

Here's a snapshot of what helped the company:

Unichem Acquisition

Torrent Pharma bought Unichem Laboratories Ltd. in November 2017. The drugmaker expects the acquisition to be break even by the end of the financial year.

It's now focusing on synergies and reviving key brands, the company's management said in a conference call. Field force rationalisation in terms of proper allocation of people for sales and marketing and lower attrition will contribute to synergies in the quarters ahead, it added.

• Nomura expects Unichem's contribution to operating income at Rs 75-80 crore a quarter compared to Rs 40-45 crore at the time of acquisition.
• Like Torrent Pharma turned around Elder Pharma's Shelcal and Chymoral brands, it can realise the full potential of Unichem brands, according to Antique Broking.
• ICICI Securities said Unichem's India business would help improve the growth trajectory and profitability in the domestic market through synergies and operational efficiency.

Domestic Focus

The dual effect of demonetisation and the goods and services tax in the past one year means pharma companies are growing on a low base. That helped most India-focused drugmakers grow faster than export-oriented peers. Torrent Pharma, with 44 percent of its revenue coming from the Indian market, benefited.

Torrent Pharma, however, lagged India-focused multinational drugmakers. That's because the MNCs derive their entire revenue from India compared with 44 percent for Torrent Pharma.

The company also expects international business to turn around, aided by improved output at its key facility at Dahej, Gujarat.

Dahej Facility

Capacity utilisation at its facility in Dahej, Gujarat—used to make products for the U.S. market—improved to 50 percent from 30 percent a year ago, the management said in a conference call. Torrent Pharma will utilise the plant to produce high-volume products for the German market, the management said.

International Business

Torrent Pharma said pricing erosion in the U.S. is stabilising at low to mid-single digits. And it expects to grow on a low base, aided by new launches.

The U.S. business is likely to gradually ramp up, helped by gViagra in the near term and two-three potential launches every quarter, according to Antique Broking.

New launches are also expected to help the company grow in the German market, the management said in a conference call.

Brazil was the sore point in the first quarter because it discontinued products and faced competition. The company is hopeful of a revival with high single-digit growth in constant currency terms this financial year.

Valuations

Torrent Pharma is the second most expensive drugmaker after Sun Pharmaceuticals Ltd. Moreover, it already trades above the Bloomberg consensus target of Rs 1,638.

Eighteen of the 32 analysts who track the stock have a ‘Buy', according to Bloomberg. Analysts from Reliance Securities Ltd. and IDFC Securities have price targets in excess of Rs 1,800.

Key Risks

Slower growth in India, delay in Unichem synergies, adverse currency moves in emerging markets and a delay in U.S. launches are the key risks for the company, according to Nomura and ICICI Securities.