RESULT UPDATE TORRENT PHARMACEUTIC ALS Performance soft; debt trajectory encouraging India Equity Research| Pharmaceuticals COMPANYNAME Torrent Pharmaceuticals (TRP) reported soft Q2FY20 numbers, in line with EDELWEISS 4D RATINGS estimates. Revenue growth decelerated to 6% YoY as US sales declined YoY Absolute Rating HOLD and remained flat QoQ, as approvals stalled due to warning letter & OAI at Rating Relative to Sector Performer Indrad and Dahej, respectively. Domestic grew 10% was primarily pricing Risk Rating Relative to Sector Medium led, dragged by the overall slowdown in IPM volume growth. This Sector Relative to Market Equalweight notwithstanding, gross margin improved 210bps YoY / 80bps QoQ led by price hike and favourable product mix. Key highlight was the ~INR5.5bn debt repayment, in line with management’s target of achieving pre- MARKET DATA (R: TORP.BO, B: TRP IN) CMP : INR 1,680 Unichem net debt/EBITDA of less than 1x by FY21. We believe, core Target Price : INR 1,625 business growth will become challenging as domestic slows, US stagnates 52-week range (INR) : 1,964 / 1,452 and margin levers from price hikes are limited by price regulation and Share in issue (mn) : 169.2 competition from trade generics. We revise up FY20/21E EPS 13%/8% to M cap (INR bn/USD mn) : 284 / 4,015 factor in tax benefit from reassessment of deferred tax liability (DTL), but Avg. Daily Vol.BSE/NSE(‘000) : 283.5 maintain earlier EBITDA estimate. Maintain ‘HOLD’ with revised TP of INR1,625 (earlier INR1,500). SHARE HOLDING PATTERN (%) Current Q1FY20 Q4FY19 Price hike, tax benefit boost earnings; debt reduction on track Promoters * 71.2 71.2 71.2 US remained flat for the third consecutive quarter. Management commented that MF's, FI's & BK’s 11.3 11.3 10.5 observations at its plants are procedural and process validation related, and expects FII's 7.5 7.5 8.6 Indrad warning letter resolution in 12-15 months. Management is confident of submitting Others 10.0 10.0 9.6 15-20 filings in the US in FY20. Domestic growth of 10% was led primarily by 7-8% price * Promoters pledged shares : NIL (% of share in issue) hike. PAT beat due to ~300bps benefit on tax rate from the reassessment of DTL. Debt reduction of ~INR5.5bn in H1FY20 is ahead of previous guidance of INR7.0bn for FY20. PRICE PERFORMANCE (%) EW Pharma Challenges across markets; FY20 likely to be tough Stock Nifty Index Growth in the domestic business has decelerated YTD, mainly due to: 1) slowdown in the 1 month (4.0) 4.2 (5.1) broader market, where volumes growth has decelerated sharply; and 2) Unichem 3 months 2.3 (1.7) (5.9) portfolio, where the growth is slower than legacy TRP portfolio. Brazil, another branded 12 months 1.0 8.3 (16.6) market and important for TRP’s overall health, has also slowed down in line with its broader economy. The US market, given last year’s high base, is likely to face challenging times this year as TRP reels under USFDA issues at its two major US facilities. Outlook and valuation: Fairly valued; maintain ‘HOLD’ The slowing economies of India and Brazil, which contribute over 50% to TRP’s revenue, Deepak Malik +91 22 6620 3147 are posing structural challenges. Uncertainty in the US over the status of plants adds to [email protected] challenges. We maintain ‘HOLD/SP’ with target price of INR1,625. Ankit Hatalkar, CFA Financials (Consolidated) (INR mn) +91 22 2286 3097 Year to March Q2FY20 Q2FY19 % change Q1FY20 % change FY19 FY20E FY21E [email protected] Net revenue 20,050 18,940 5.9 20,220 (0.8) 74,618 79,255 87,006 Aashita Jain EBITDA 5,410 4,730 14.4 5,410 - 19,831 21,275 23,774 [email protected] Adj. diluted EPS 14.4 7.3 97.6 12.8 13.0 44.0 53.9 70.0 P/E (x) 38.3 31.3 24.1 EV/EBITDA (x) 16.2 15.0 13.1 RoAE (%) 15.9 18.1 20.5 October 24, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Pharmaceuticals Q2FY20 conference call: Key highlights Guidance R&D likely to remain at 7-8% of revenue. Tax rate for full year: 18%. o This is due to the new tax ordinance, which led to reassessment of DTL. Gross margin stands at 72% and the company has guided for 72-73% margin. Other expenses will remain in the INR5.55-5.6bn range for coming quarters. Domestic According to secondary data, volume growth of 3.4%, price growth of 8.4% YoY. o Management commented that this is sustainable if the competitive scenario permits. Trade generics volume growth came at 6-8%, while that in branded generics was in double digits. o The company is open to evaluate entry into trade generics in the future. Current PCPM stands at INR720,000. The company has completed rationalisation from the Unichem integration and expects additional revenue synergies. US Sales of about USD52.4mn in Q1FY20. There were no further recalls in losartan. The company expects Indrad warning letter’s resolution in 12-15 months. Dahej plant will require reinspection. The company has 42 ANDAs pending approval. o Expected launches towards the end of the year include ticagrelor, vilfagliptin and remogliflozin. The company expects to return to the losartan market, but cautiously. It continues to source APIs from two partners—Hetero and Zydus. Debt repayment schedule In H1FY20, the company repaid INR5.5bn. Management had previously guided for INR7bn debt reduction in FY20. Management guided that by FY21, it targets to achieve net debt/EBITDA of less than 1x, which is the pre-Unichem level. 2 Edelweiss Securities Limited Torrent Pharmaceuticals Table 1: Actual versus Edelweiss estimates (INR mn) Q2FY20 YoY (%) Edel estimates YoY (%) Deviation from Actual (%) Net Revenue 20,050 5.86 20,400 7.7 (1.7) Raw material costs 5,380 (1.8) 5,610 2.4 (4.1) Gross profit 14,670 9.0 14,790 9.9 (0.8) Gross margin (%) 73.2 72.5 Employee costs 3,580 4.4 3,807 11.0 (6.0) Other expenses 5,680 11.2 4,000 1.5 42.0 EBITDA 5,410 14.4 5,633 19.1 (4.0) EBITDA margin (%) 27.0 27.6 Net finance expense (income) 1,160 (7.9) 1,200 (4.8) (3.3) Depreciation 1,630 7.2 1,600 5.3 1.9 Other income 340 240.0 200 100.0 70.0 PBT 2,960 13.6 3,033 16.4 (2.4) Income tax expense 520 100.0 728 179.9 (28.6) Tax rate (%) NA 24.0 Reported net profit 2,440 4.1 2,305 (1.7) 5.9 Adj. PAT 2,440 97.6 2,305 86.6 5.9 Adjusted diluted EPS (INR) 14.4 97.6 13.6 86.6 5.9 Source: Company, Edelweiss research Table 2: Revenue mix by segment – Consolidated (INR mn) Year to March Q2FY20 Q2FY19 % change Q1FY20 % change India 8,990 8,160 10.2 9,070 (0.9) US 3,800 3,930 (3.3) 3,760 1.1 Brazil 1,560 1,470 6.1 1,740 (10.3) Germany 2,500 2,510 (0.4) 2,620 (4.6) Others 1,970 1,670 18.0 1,790 10.1 Others (Incl. Contract Manufacturing) 1,230 1,200 2.5 1,240 (0.8) Total 20,050 18,940 5.9 20,220 (0.8) Source: Company, Edelweiss research Chart 1: India sales grew 10% YoY 10,000 100% 8,000 75% 6,000 50% (INR mn) (INR 4,000 25% Growth (%) Growth 2,000 0% 0 -25% Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 India YoY growth Source: Company, Edelweiss research 3 Edelweiss Securities Limited Pharmaceuticals Chart 2: US sales remained flat QoQ 75 75% 60 45% 45 15% 30 -15% Growth (%) Growth (USD mn) (USD 15 -45% 0 -75% Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 US YoY growth Source: Company, Edelweiss research 4 Edelweiss Securities Limited Torrent Pharmaceuticals Financial snapshot (INR mn) Year to March Q2FY20 Q2FY19 % change Q1FY20 % change YTD20 FY20E FY21E Net revenues 20,050 18,940 5.9 20,220 (0.8) 40,270 80,703 88,544 Cost of revenue 5,380 5,480 (1.8) 5,590 (3.8) 10,970 21,790 23,907 Gross profit 14,670 13,460 9.0 14,630 0.3 29,300 58,913 64,637 R&D 1,300 1,360 (4.4) 1,360 (4.4) 2,660 5,407 6,198 EBITDA 5,410 4,730 14.4 5,410 0.0 10,820 21,275 23,774 EBITDA margin 27.0 25.0 26.8 53.7 26.4 26.9 Depreciation 1,630 1,520 7.2 1,600 1.9 3,230 6,300 6,200 EBIT 3,780 3,210 17.8 3,810 (0.8) 7,590 14,975 17,574 Interest 1,160 1,260 (7.9) 1,220 (4.9) 2,380 4,625 3,829 Other income 340 100 240.0 200 70.0 540 1,054 1,076 Add: Exceptional items - 555 (100.0) - - - - Profit before tax 2,960 2,605 13.6 2,790 6.1 5,750 11,404 14,821 Provision for taxes 520 260 100.0 630 (17.5) 1,150 2,281 2,964 Minority interest Reported net profit 2,440 2,345 4.1 2,160 13.0 4,600 9,123 11,857 Adjusted Profit 2,440 1,235 97.6 2,160 13.0 4,600 9,123 11,857 Diluted shares (mn) 169 169 169 338 169 169 Adjusted Diluted EPS 14.4 7.3 97.6 12.8 13.0 27.2 53.9 70.0 Cost of revenue 26.8 28.9 27.6 54.5 27.0 27.0 Gross profit 73.2 71.1 72.4 145.5 73.0 73.0 R&D 6.5 7.2 6.7 13.2 6.7 7.0 Total expenses 73.0 75.0 73.2 146.3 73.6 73.1 Operating profit 18.9 16.9 18.8 37.7 18.6 19.8 Reported net profit 12.2 6.5 10.7 22.9 11.3 13.4 Tax rate - 10.0 22.6 22.6 20.0 20.0 5 Edelweiss Securities Limited Pharmaceuticals Company Description TRP is focused on branded formulations with majority of the business coming from India, US, Brazil and emerging markets.