Torrent Pharmaceuticals' Q4FY18 results (Outperformer) - Unichem integration starts off well

Q4FY18 result highlights

• Rev at Rs17.2bn (+20%/17% yoy/qoq) came higher vs est Rs16.4bn. India came ahead at Rs6.9bn (+48%; LTL 54%) vs est of 45% growth aided by Unichem consolidation. Ex Unichem, sales grew +11% / +8% for the Q4 / FY18.  LTL sales growth was 17% / 12% for the periods.
• US reported higher sales at Rs3.07bn (+15% qoq; est Rs2.6bn) aided by the BiPharma acquisition. Brazil came in lower at Rs2.15bn (flat yoy; est Rs2.3b). CRAMS sharply higher at 1.3bn (+115% qoq) vs est of Rs700mn.
• EBITDA came in lower at Rs3.6bn (+1% qoq) vs est of Rs3.95bn. Adjusted for Rs500m one-off M&A related costs, EBITDA at Rs4.1bn was marginally ahead. Adj EBITDA margins of 24.1% were in-line.
• GMs stayed steady at 73.5%. Other exp came at Rs5.78bn (27+% qoq) due to Rs500m one-expenses. Other income stood lower at Rs420mn vs est of Rs750mn. Depr stood higher at Rs1.5bn vs est of Rs1.39bn.
• Tax rate was negative for the quarter vs est of 25%. Consequently reported PAT stood higher at Rs2.28bn vs est of Rs1.53bn
• Guidance: Unichem acquisition to be completely integrated by FY19-end ahead of schedule. Green shoots visible.

Key positives:  Higher India and US rev; higher GMs

Key negatives: Lower Brazil sales, higher cost   

Impact on financials: We have maintained our EBITDA estimates but FY19E/20E earnings est stand reduced by 13%/8% to account for higher depreciation and deferred tax

Valuations & view

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. 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. Domestic business profitability combined with broad-based improvement in exports should drive 34%/32% EBITDA/PAT CAGR with strong free cash generation over FY18-20E, in our view. Maintain Outperformer with a 12 month price target price of Rs1657 (13x FY20E EV/ EBITDA).