Torrent Pharma

Buy Torrent Pharma, target Rs 283: Kotak PCR
Kotak PCR is bullish on Torrent Pharma and has maintained buy rating on the stock with target price of Rs 283.

Kotak PCR research report on Torrent Pharma

German operation to break even in FY09.

We expect German business to break-even by FY09 led by shift in manufacturing to India (site transfer), launch of new products and new supply contracts. At present, Torrent is sourcing part of the products from Heumann PCS GmbH (a manufacturing arm of Heumann owned by Pfizer Inc.), as part of the agreement, and partly from third party manufacturers. The sourcing agreement with Pfizer is terminating in December 2007 and the company will source its requirement from its US FDA approved plant at Chatral, India.

We expect margin expansion of ~6-9% over the next one-year, volume growth of around 20-22% and value growth of 7-8%. Torrent has planned to launch six new products in the German markets over the next 12 months, which will include two day-one introduction. Further, the company is focusing on building relationship with high potential doctors, related pharmacist and entering into contract with insurance companies.

US markets to contribute to revenues by FY09.

During the previous year, Torrent received USFDA approval for its API and formulation manufacturing facilities. This should help to start the US business. So far, the company has invested Rs.750 million in the US market. It expects further investments of USD3-4 million in product development. The company has filed seven ANDAs and five DMFs. Torrent has received approval for three ANDAs, namely, Metformin, Sertraline and Citalopram. The company expects to file 14 ANDAs and nine DMFs in FY08. Investment/ losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. We expect USD10 million sales in FY09 from the US market.

Brazilian markets to continue to do well; Mexico to follow.

The company has done exceedingly well in Brazil, creating a large business in five years. We expect the growth momentum to continue. This will be led by improved sales force productivity and new product launches. Torrent has completed the investment in setting up its marketing and distribution network and field force rationalization. The company has a strong product development pipeline. Torrent is planning to launch four new products in FY08. These molecules are growing at 20-22%. The company expects to grow at 1.5 times the molecule growth rate. We believe Torrent's product pipeline for the Brazilian market will help the company to maintain 30% and 25% growth in FY08 and FY09, respectively. Under the same country head, and a similar branded strategy, the company is expanding into Mexico. The company expects to launch four products in Mexico in FY09.

Domestic formulations likely to grow at 20% in FY08.

For FY07, the domestic formulations business grew 25.2% to Rs.5.6 billion accounting for 43% of total sales. This growth rate was largely due to the buoyant performance of the diabetology, neuro-psychiatry and pain management portfolios, impact of field force expansion done in previous years, improved doctor coverage and new introductions made during the year. We expect the trend to continue at least for the next couple of years. We expect 20% growth in FY08 and 15% growth in FY09.

Contract manufacturing business to provide constant cash flow.

Torrent has entered into a long-term contract manufacturing agreement with the Indian subsidiary of Denmark based Novo Nordisk. According to the agreement, the company will supply insulin to Novo Nordisk. In FY07, revenues from the contract manufacturing segment were Rs.1.19 billion or 9.4% of net sales. Torrent is facing capacity constraints. The company is planning to increase insulin capacities at an investment of Rs.420 million in FY08. The management has guided that this business will grow stably at single digit growth rate, providing the company constant cash flow.

Valuation & recommendation

We believe Torrent will perform steadily on its base business, going forward. The company's growth engines of domestic formulations and branded formulations from Brazil and Russia are performing according to expectations. As the manufacturing of more products is transferred to India, we believe Torrent's margins would expand to 14% in FY08. We expect net profit of Rs.1.24 billion in FY08 and Rs.1.58 billion in FY09. This implies an EPS of Rs.14.6 and Rs.18.7, respectively. At the current market price of Rs.184, the stock is trading at 12.6x FY08 and 9.9x FY09 earnings estimates, and 7.1x FY09 EV/ EBITDA. We recommend a buy on the stock with a target price of Rs.283, based on DCF methodology. At the target price, the stock will be valued at 15.2x FY09 earnings.

Key risks & concerns

Inability to improve profitability of international operations, mainly in Germany q International generic pricing pressure and/or loss of market share. Delay in ANDA filing and/or approval followed by delay in new product launch. Further rupee appreciation against the dollar