Torrent Pharma

While FY08 was under pressure due to losses registered by its German arm, Torrent Pharma is showing signs of recovering to a profitable FY10
GIVEN its performance and growth potential, Torrent Pharma is a relatively under-valued stock in the Indian pharma space. However, the stock has out-performed the broader indices in the past 12 months. While the Sensex declined by over 40% last year, the stock is trading around the same level.

The company has been on a growth path in the past two fiscals. While the losses registered by the German subsidiary adversely impacted its overall growth in FY08, the company is showing signs of a recovery and is likely to bounce back by FY10.

Business:

Incorporated in 1972, the Ahmedabad-based Torrent Pharma is engaged in the production of drug formulations and contract manufacturing. The domestic branded formulations, exports and contract manufacturing contribute 44%, 45% and 11% to the company’s total revenues respectively. The company has a strong presence in the high-value chronic therapies of cardio vascular, gastrointestinal, central nervous system (CNS) and anti-diabetes. The company’s top 10 brands constituted 41% of its total domestic formulation sales in FY’08 as against 44% in the previous year.

Torrent’s major international operations are situated in Brazil, Europe, Russia and the former Soviet republics in Eastern Europe and Central Asia. It has nine wholly owned subsidiaries in various regulated and semi-regulated markets abroad. The pharma company’s other revenue source is contract manufacturing, which largely comprises of sourcing, manufacturing and supplying insulin formulations under a third-party brand name.

Torrent is steadily ramping up its product development activity. Research and development (R&D) expenditure account for 7% of its revenues, with a 70:30 spend ratio towards product development and discovery research. The company has a healthy product pipeline for the US and European markets on expiry of the patents. It also undertakes new drug discovery research and currently has seven new chemical entities (NCE) in diabetes and related ailments.

Growth Strategy:

The domestic formulations business and operations in the semi-regulated markets of Brazil, Russia and countries in Eastern Europe and Central Asia are the growth drivers for the company. These markets are witnessing a double-digit volume growth. The company is bullish on its international generic business. Many of its international operations have achieved critical size, leading to revenue traction.

Torrent’s domestic business also benefits from the tax-free status enjoyed by its manufacturing operations. Its units, located at Baddi and Sikkim, enjoy tax exemption for 5 and 10 years respectively. This enables it to compete effectively in a pricesensitive market.

Financials:

The company’s net sales rose at a compound annual growth rate (CAGR) of 28.7% over the past five years to Rs 1355 crore in FY08. The net profits have grown at a CAGR of 25% to Rs 134.6 crore in FY08. At an average dividend payout of 25% over the past three years, the company’s dividend payouts have grown at a CAGR of 12% over the past five years, half than the corresponding profit growth. The company has positive operating cash flows and a debt equity ratio lower than one.

The company’s sales growth in FY08 was weighed down by de-growth in its German subsidiary Heumann in wake of severe price erosions and a volume shift to unexplored segments. The company expects to shift 70-80% of Heumann’s manufacturing to India. The subsidiary is thereby expected to break even in FY10.

The past twelve months have reflected the recovery in the company’s operations and profitability. The position is likely to improve going forward. Recent measures such as realignment of field operations, cost-cutting, and shifting of manufacturing from Germany to India are expected to beef up the profit margins.

Valuations:

Torrent has outperformed the Sensex and is currently valued at little over its annual turnover. It witnessed a stable 22% return on capital employed (ROCE) over the past two years. It is an under-valued stock among similar-sized peers and holds promise for investors looking for value in the mid-cap space.

Stock views on Unity Infraprojects, IRB Infrastructure, Torrent Pharma

Sharekhan on Unity Infraprojects - Target Rs 430

Sharekhan has maintained its buy rating on Unity Infraprojects, with price target of Rs 430, in its report.

"We have not factored in any dilution from the likely QIP in our estimates due to lack of clarity on the QIP. In view of the company’s ability to bag big-ticket orders and the order inflow of Rs 400 crore seen by the company in the financial year till date (28% of our FY2010 order inflow), we remain positive on Unity Infraprojects. We maintain our Buy recommendation on the stock with a price target of Rs 430. At the current market price, the stock is trading at attractive valuations of 6.4x FY2010 earnings estimate and 6.0x FY2011 earnings estimate," says Sharekhan's report.


India Capital Markets on IRB Infra - Target Rs 260

India Capital Markets has recommended a buy rating on IRB Infrastructure Developers with a target of Rs 260 in its research report.

"We have valued the company on an SOTP. The BOT road project at Rs 154.4 (FY11E NPV basis) and Core Construction Business at Rs 74.0 (12x on FY11 earnings), NAV of the Real Estate valued at Rs 10.3, Wind Mills at Rs 3.2 and Cash in holding Co at 17.8 per share. Thus aggregation to Rs 259.7/ per share. Hence, we recommend clients to “BUY” the stock for a long term basis on the back of key surprises & development expected on the order book front. We initiate the coverage with the target price of Rs 260," says India Capital Markets' report.

Karvy Stock Broking on Torrent Pharma - Target Rs 330

Karvy Stock Broking has maintained its buy rating on Torrent Pharmaceuticals with a target price of Rs 330 in its research report.

"We maintain our FY2010 and FY2011 revenue and earnings estimates. The stock is currently quoting at 9x FY2010E and 7.7x FY2011E. In lieu of the current re-rating in the stock we upgrade our multiple from 8.1 x to 10 x We revise our price target upwards by 22% to Rs 330 based on 10x FY2011E. We maintain our 'BUY' rating on the stock," says Karvy's research report.