Company update: Torrent Pharmaceuticals (Outperformer) - Stepping on gas

Torrent Pharmaceuticals Limited’s (TPL) recent acquisition of Unichem’s domestic formulation business for Rs36bn is the company’s second big-ticket transaction in the domestic market in last 5 years. The acquisition strengthens TPL’s chronic presence and positions it among the top 5 players in India’s lucrative branded generics market. Buoyed by a sharp rise in its domestic business profitability metrics and successful integration of Elder Pharma business over last 3-4 years, TPL is confident of creating significant value from the Unichem acquisition. Torrent expects profitability from its Unichem portfolio (20-22% currently) to expand sharply and align with Torrent’s profitability (>40%) over next 2-3 years. Profitability in the domestic business combined with broad-based improvement in exports should drive 31%/21% EBITDA/PAT CAGR with strong free cash generation over FY18-20E, in our view. Maintain Outperformer with a 12 month price target price of Rs1,657 (13x FY20E EV/EBITDA).

Unichem acquisition – Potential winner post Elder: The Unichem acquisition will strengthen Torrent’s cardiology portfolio, especially in the fast-growing Anti-Hypertensive (AHT) segment, deepen reach in non-metros and help build its OTC business. Unichem’s high field force attrition (40% vs ~10% for Torrent) combined with its low field force productivity (Rs0.25m/month vs Rs0.65m/month for Torrent) offers significant profitability expansion opportunities. We estimate Unichem’s portfolio EBITDA to double to >Rs4bn (37% EBITDA margin) over FY18-20E.

Export business – worst is behind: Torrent’s export business has been hobbled by a high base in the US and currency challenges across emerging markets (EM). We estimate US sales to have bottomed at ~US$40mn/qtr and growth to be driven by new product launches. Torrent is positive on the current tough US market and will continue to invest in R&D. A stable currency, pickup in new product approvals and above market growth will drive its Brazilian business. With manufacturing capacity increasing post commissioning of Dahej plant, we expect the company’s Germany and UK businesses to see a boost. We estimate ~14% export CAGR over FY18-20E.

Stepping on gas: TPL is one of the most competitive mid-sized pharma company in India, with Rs56bn branded formulation sales (FY20E) across India, Brazil and EMs and a growing US generics business. The company’s focus on profitability adds to its competitiveness. Torrent’s Rs36bn bet on Unichem, followed by buyout of Bio-Pharma Inc. (a niche US generic business) - amid challenging times for the Indian pharma industry - signals optimism on its long term outlook for the business. We maintain Outperformer on the stock; Torrent is among our preferred mid-cap picks.