MOSL: TORRENT PHARMACEUTICALS (Neutral)-Turnaround of acquired business on track

Torrent Pharmaceuticals: Turnaround of acquired business on track;  better outlook for US market

(TRP IN, Mkt Cap USD3.8b, CMP INR1523, TP INR1430, 6% Downside, Neutral)

• Improved operating margin offset by interest cost and depreciation: TRP's revenue increased 36% YoY to INR18.7b (our estimate: INR18b), led by (a) a low base, (b) addition of the Unichem portfolio in the domestic formulation (DF) business, (c) volume-driven growth in the US and (d) new launches in Germany. Gross margin shrank 70bp YoY, driven by a change in the sales mix and price erosion in the US. However, EBITDA margin expanded 390bp YoY to 25.5% (our estimate: 22.4%), led by improved productivity and cost rationalization. EBITDA grew 60% YoY to INR4.8b. However, increased depreciation and interest cost led to a PAT decline of 13.3% YoY to INR1.6b.
• DF, US and Germany pump up revenue: DF segment (44% of sales) grew 79% YoY in 1QFY19. Ex-Unichem and adjusting for GST-led disruption in 1QFY18, DF growth was at 9.1% YoY. US business (18% of sales) grew 23% YoY, led by volume growth, addition of the bio-pharma business and INR depreciation. Germany business (13% of sales) grew 32% YoY, led by new launches and better traction in existing molecules. Brazil business (-7% YoY) dragged revenue growth due to temporary stoppage of sales of one brand and intensifying competition in some brands. On a CC basis, Brazil revenue was flat YoY.
• Earnings call takeaways: (1) TRP is on track to (a) reduce the attrition rate of field force acquired from Unichem and (b) improve brand sales and productivity. (2) After two launches in the US in 1QFY19, TRP is confident of launching 15 ANDAs in FY19. (3) Price erosion in the US market has stabilized at low-single-digit. Gross margin is expected to remain in the 71-72% range. Other expenses are expected to be ~INR5b per quarter for FY19.