Result Update July 30, 2015 Rating matrix Rating : Buy Target : | 1660 | 1418 Torrent Pharmaceuticals (TORPHA) Target Period : 12 months Potential Upside : 17% Blow-out quarter driven by gAbilify… What’s Changed? • Revenues grew 75% YoY to | 1947 crore (I-direct estimate: | 1427.9 Target Changed from | 1450 to | 1660 crore) mainly on the back of 230% YoY growth in the US to | 888 EPS FY16E Changed from | 54.4 to | 94.4 crore driven by gAbilify (CNS) launched under shared exclusivity. EPS FY17E Changed from | 72.2 to | 79 Domestic revenues increased 39% YoY to | 491 crore Rating Unchanged • EBITDA margins increased 1571.8 bps to 46.7% against I-direct Quarterly Performance estimate of 28%. EBITDA grew 163.5% YoY to | 909.0 crore against Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%) I-direct estimate of | 399.8 crore Revenue 1,947.0 1,114.0 74.8 1,154.0 68.7 • Net profit was up 75.4% YoY to | 449 crore (I-direct estimate: | 256 EBITDA 909.0 345.0 163.5 162.0 461.3 crore) owing to a strong operating performance EBITDA (%) 46.7 31.0 1572 bps 14.0 3265 bps Strong export growth driven by US Net Profit 449.0 256.0 75.4 130.0 245.5 Despite the late entrance in the US market, the company has built up a healthy pipeline of 68 filed ANDAs and 49 approvals. The US remains in Key Financials good shape with exclusivity (shared) launches such as gAbilify and (|crore) FY14 FY15 FY16E FY17E gCymbalta exclusivity sunset have proven Torrent’s capabilities. We Revenues 4184.0 4653.0 7262.3 7118.2 expect US sales to grow at a CAGR of 49.7% in FY15-17E to | 1864.5 EBITDA 952.0 1020.0 2558.1 1824.0 crore. Brazil has started showing signs of a recovery with a recalibrated Net Profit 663.9 750.9 1598.1 1336.6 EPS (|) 39.2 44.4 94.4 79.0 approach. Other export markets like Europe are growing at a steady pace. We expect Europe (including other generic markets) and Brazil sales to grow at a CAGR of 6.4% and 6.5% to | 1054 crore and 687.5 crore, Valuation summary respectively, in FY15-17E. FY14 FY15 FY16E FY17E PE (x) 36.2 32.0 15.1 18.0 Indian formulation growth steady Target PE (x) 42.3 37.4 17.6 21.0 Branded formulations have grown at a CAGR of 17.3% in FY10-15, driven EV to EBITDA (x) 12.8 13.6 5.1 6.6 by chronic focus and Elder acquisition. The acquisition of Elder Pharma’s Price to book (x) 12.6 9.6 6.7 5.2 branded portfolio has added new therapies such as neutraceuticals and RoNW (%) 34.9 30.2 44.4 29.0 gynaecology and has helped in filling up the portfolio gaps. Elder’s RoCE (%) 27.5 19.8 44.9 30.3 portfolio is also margin accretive. We expect Indian branded formulations to grow at a CAGR of 21.1% in FY15-17E to | 2371.8 crore. Stock data Chronic focus, diversified portfolio, nimble-footed approach Particular Amount Torrent has remained ahead of the curve when it comes strategic Market Capitalisation | 24063 crore decision making. In domestic formulations, it concentrated on high Debt (FY15) | 2740 crore Cash (FY15) | 567 crore yielding chronic therapies such as CVS and neuropathy when most Indian EV | 26236 crore players were growing in anti-infectives (acute). The company was one of 52 week H/L 1520/722 the early entrants in the Brazilian markets. It acquired a marketing Equity capital | 84.6 crore company in Germany in 2005. Torrent also struck a CRAMS deal with Face value | 5 Novo-Nordisk in the Indian market for insulin. Just when it was witnessing a slowdown in domestic formulations, it acquired Elder’s lucrative Price performance (%) formulations business. US launches such as gAbilify and gCymbalta have 1M 3M 6M 1Y strengthened the US business and overall financial health. Strong margins Torrent Pharma 9.8 16.9 24.9 97.2 and high return ratios are some of the major differentiators for Torrent. Aurobindo Pharma 4.2 14.1 19.7 115.7 US, Brazil, India key catalysts for future; maintain BUY Biocon -1.6 2.6 11.2 -2.1 Ipca Labs -3.0 7.4 8.3 -1.7 Strong Q1FY16 financials were on the back of windfall gains from gAbilify sales in the US. We have increased our FY16E and FY17E EPS estimates by 73.5% and 9.4% to | 94.4 and | 79.0, respectively, due to strong gAbilify sales. The US remains on a strong growth path with the launch of gAbilify under shared exclusivity, which is the second such product after Research Analyst gCymbalta providing strong traction that is far ahead of expectation. Siddhant Khandekar These kinds of windfall free cash flows are likely to bring down the [email protected] leverage position and will pave the way for further acquisitions. Going Mitesh Shah [email protected] ahead, US, India and Brazil will be the pillars for future growth driven by Nandan Kamat new product launches and improvement in market share. We maintain [email protected] BUY with a revised target price of | 1660 (21x FY17E EPS of | 79.0). ICICI Securities Ltd | Retail Equity Research Variance analysis Q1FY16 Q1FY16E Q1FY15 Q4FY15 YoY (%) QoQ (%) Comments Revenue 1,947.0 1,427.9 1,114.0 1,154.0 74.8 68.7 Strong growth mainly due to 230% growth in the US on the back of gAbilify launch under shared exclusivity. Raw Material Expenses 418.0 399.8 301.0 361.0 38.9 15.8 Employee Expenses 210.0 257.0 184.0 234.8 14.1 -10.6 Other Expenditure 410.0 371.2 284.0 396.2 44.4 3.5 EBITDA 909.0 399.8 345.0 162.0 163.5 461.3 EBITDA (%) 46.7 28.0 31.0 14.0 1572 bps 3265 bps Strong margins on the back of gAbilify Interest 58.0 55.3 24.0 47.0 141.7 23.4 Depreciation 59.0 57.2 21.0 60.0 181.0 -1.7 Other Income 67.0 70.3 49.0 100.0 36.7 -33.0 Higher other income largely due to forex gains PBT before EO & Forex 859.0 357.7 349.0 155.0 146.1 454.4 EO 0.0 0.0 0.0 0.0 0.0 0.0 PBT 859.0 357.7 349.0 155.0 146.1 454.4 Tax 410.0 75.1 93.0 25.0 340.9 1,540.0 Higher taxation mainly due to inventories built-up in the US for gAbilify PAT before MI 449.0 282.6 256.0 130.0 75.4 245.5 MI 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 449.0 282.6 256.0 130.0 75.4 245.5 Strong operational performance partly mitigated by higher tax outgo Key Metrics India 491.0 427.2 353.0 399.0 39.1 23.1 Growth on the back of acquisition of Elder's porfolio. Excluding this, base business growth was 15%. Brazil 138.0 134.1 149.0 140.8 -7.4 -2.0 Brazil constant currency growth was 20% YoY USA 888.0 480.6 269.0 224.0 230.1 296.4 Growth was mainly due to gAbilify Europe (Incl. Others Generic 242.0 224.0 249.0 209.0 -2.8 15.8 Europe constant currency growth was 16% YoY markets) Source: Company, ICICIdirect.com Research Change in estimates FY16E FY17E (| Crore) Old New % Change Old New % Change Comments Revenue 5,689.6 7,262.3 27.6 6,739.0 7,118.2 5.6 Revised FY16E estimates upwards on the back of windfall gains from gAbilify EBITDA 1,351.4 2,558.1 89.3 1,693.2 1,824.0 7.7 EBITDA Margin (%) 23.8 35.2 1142 bps 25.1 25.6 52 bps Enhanced margin expectations on the back of lower-than-expected price erosion in gAbilify PAT 921.3 1,598.1 73.5 1,222.2 1,336.6 9.4 Increase in sync with EBITDA and reduction in interest cost EPS (|) 54.4 94.4 73.5 72.2 79.0 9.4 Source: Company, ICICIdirect.com Research Assumptions Current Earlier Comments (| crore) FY14 FY15 FY16E FY17E FY16E FY17E India 1,176.0 1,617.0 2,010.0 2,371.8 2,007.2 2,398.8 Brazil 533.0 605.6 585.9 687.5 696.5 818.1 Reduced expectation due to currency depreciation USA 776.0 831.7 2,648.3 1,864.5 1,234.8 1,605.2 Enhanced FY16E sales expectation on the back of gAbilify windfall Europe (Incl. Others 934.0 930.7 954.1 1,053.9 918.9 1,010.8 Generic markets) Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis Incorporated in 1959, the company is a mid-size generic player with a strong presence in the domestic and semi-regulated markets and a growing presence in regulated markets. Torrent is also present in the Indian CRAMS space via supply agreement with Danish pharma major Novo Nordisk for the latter’s insulin business in India. Chronic therapies such as cardiovascular, neurology and diabetology are the main focus areas for the company along with acute therapies such as anti-infectives and gastrointestinal.