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Torrent Pharmaceuticals' Q4FY19 results (Outperformer) - Disappointing; US blues

Q4FY19 result highlights

• Revs (Ex-OOI) at Rs18.2bn (+8%yoy) is below est of Rs 19.6bn. OOI came at Rs340mn (est of Rs360).  India revs came at Rs7.54bn vs est Rs8.35bn; mgt didn’t break it along Unichem and core but reiterated that momentum was intact as the biz grew 11% on adj basis as per AIOCD. US core revs came at $52m ($59m in Q3) vs est $58m. Brazil and Germany came marginally higher.
• EBITDA came below est at Rs4.73bn. EBITDA margins 25.5% were below est of 27.1%. EBITDA was primarily impacted by lower revenues.  GMs were 71.3% vs 71.7% in Q3.
• PBT came at Rs2.07bn vs est Rs2.6bn. Tax rate was low at 1% vs est of 27%. Aided by low tax, PAT was Rs2.05bn vs est Rs2.2bn.
• US Blues – A) Torrent booked Rs3.57bn exceptional charge – Rs1.4bn towards Losartan recall and Rs2.17bn towards impairment in US Bio-Pharma business. The latter was totally unexpected as Torrent wrote-off ~50% of acquisition costs within 16m of acquisition. B) Torrent has stopped selling gLosartan / gLosartan-H in US from Q4FY19 onwards. Notably, this was Torrent’s largest US product and the full impact will be reflected in FY20. C) Uncertainty continues on the status of new ANDA approvals from both Indrad / Dahej facilities post their recent FDA inspections. This may impact revenue from new product launches.

Impact on financials: We have cut FY20/FY21 earning est by 24% / 18% to incorporate sharply lower US sales and marginally lower India growth.

Valuations & view

Q4FY19 has been Torrent’s most disappointing quarter in a while driven by a slew of negative developments in US along with softer India sales. While the gLosartan withdrawal is unfortunate, impairment in Bio-Pharma doesn’t reflect well on mgt’s capital allocation capabilities. We now estimate ~20% decline in FY20 US sales with the recovery trajectory contingent on Torrent’s ability to stay compliant with FDA norms. On the positive side, despite the weak sales in the quarter, Torrent’s core franchise of branded business across India, Brazil and RoW remain relatively sturdy as mgt continues to guide above market growth across these markets. This combined with continued cost control should drive profitability recovery from FY21 onwards. Maintain Outperformer with price target of Rs1720. Recommend adding into the weakness.