MOSL: TORRENT PHARMACEUTICALS (Neutral)-Weak revenue-margins remain stable

​Torrent Pharmaceuticals: Weak revenue; margins remain stable

(TRP IN, Mkt Cap USD3.5b, CMP INR1317, TP INR1350, 3% Upside, Neutral)

• TRP reported sales of INR13.5b (-11% YoY; >10% below est.). The miss is attributed to a decline in domestic revenue due to GST roll-out. Despite this, gross margin stood at 70.3% (up >500bps QoQ), a positive surprise, as India is the most profitable business. EBITDA margin came in at 22% (+60bp QoQ). R&D as % of sales stood at 7.5% in 1Q v/s 9.8% in 4QFY17 and 6.0% in 1QFY17.
• India biz impacted by GST; pricing pressure continues in US: India business declined ~9% YoY due to channel destocking ahead of GST rollout. Secondary sales remained strong (at mid-teens). The company expects India business to grow in double-digits, led by strategic initiatives undertaken since 2QFY16. US business remained largely flat QoQ at INR2.7b due to continued pricing pressure in base business, offset by recent launches, including gCelecoxib. We expect this business to remain under pressure in FY18 due to further price erosion in base business, partially offset by 5-6 new launches in FY18E (~25 pending ANDAs). TRP is also focusing on in-licensing of products in the US.
• Earnings call takeaways: 1) Plans to file 15-16 ANDAs in FY18. 2) Pricing pressure in US in 1QFY18. 3) Tax rate guidance of 21-22% in FY18. 4) Dahej- formulations facility inspected in Jun-17, and received five 483 observations. 5) Renvela launch deferred for more than a year. 6) Tax rate to stay at ~20% in FY18. 7) According to AIOCD, secondary sales of Novartis brand acquired were ~INR31cr (annualized at June-end). 8) Local currency growth in Germany was ~12% YoY (~8% YoY in reported terms). 9) Capex guidance of INR4b in FY18 and FY19.