January 27 2011 Torrent Pharmaceuticals Ltd (TORPHA)content.icicidirect.com/mailimages/ICICIdirect... · 2017-08-01 · Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 4,000 5,000 6,000 7,000

January 27 2011

ICICIdirect.com | Equity Research

Initiating Coverage

ICICI Securities Limited

Chronic focus, generics to drive growth… Torrent Pharmaceuticals Ltd (TPL) is a mid-sized generic player with a strong presence in the domestic and semi-regulated markets and a growing presence in regulated markets. Besides, TPL also has a presence in the CRAMS business. TPL’s sales have grown at a robust CAGR 0f ~28% in FY05-10, mainly driven by the impressive performance of the international segment (47% CAGR). With the company’s continued focus on capturing the opportunities from the high-growth chronic segment in existing and new markets, we project its total revenues will grow at a CAGR of ~18% to | 3155 crore in FY10-13E. We are initiating coverage on the stock with a BUY rating.

International markets to continue growth momentum

The international formulations segment continues to be a significant growth driver for TPL (share of 51% in gross sales in FY10 vs. 24% in FY05), primarily driven by aggressive product launches and strategic entry into new markets (Brazil, Germany, US and ROW). While we expect Brazil to remain the largest market for TPL outside India, US and Europe will lead the company’s expansion in the developed markets. We project that sales from international formulations will grow at a CAGR of ~20% to | 1625 crore in FY10-13E.

Domestic formulation business to provide cushion

Domestic formulations segment remains a key market for TPL (39% of gross sales in FY10) with a strong presence in the high-growth chronic therapies primarily CVS (second position by sales value in FY10) and CNS (third position) in India. With the significant increase in field force, rising penetration in smaller towns and new product launches in existing and new therapeutic areas, TPL’s sales from domestic formulations are expected to grow at a CAGR of ~18% to | 1189 crore in FY10-13E.

Valuations At | 591, TPL is trading at ~14x FY12E EPS of | 42.2 and ~12x FY13E EPS of | 50.5. The stock is currently trading at a ~40-45% discount to Lupin, Cadila, Sun Pharma and Glenmark (larger peers with similar models). With good growth anticipated from both domestic and international markets and a strong balance sheet, we expect the gap to decrease in due course. Consequently, we have valued TPL at | 657/share at 13x FY13E EPS of | 50.5. We are initiating coverage on the stock with a BUY rating. Exhibit 1: Key Financials (| Crore) FY08 FY09 FY10 FY11E FY12E FY13ETotal Revenues 1,355 1,631 1,904 2,249 2,666 3,155EBITDA 210 303 410 453 569 656Adjusted Net Profit 135 193 243 295 357 427PE (x) 37.1 26.0 20.6 17.0 14.0 11.7Target PE (x) 41.2 28.8 22.8 18.8 15.5 13.0EV/EBITDA (x) 24.9 17.3 12.5 11.4 9.0 7.6P/BV (x) 9.8 7.7 6.0 4.7 3.7 3.0RoNW (x) 29.3 31.8 31.2 31.1 29.7 28.3RoCE (%) 21.7 26.0 29.1 26.7 29.1 29.4

Source: Company, ICICIdirect.com Research

Torrent Pharmaceuticals Ltd (TORPHA) | 591

Rating Matrix Rating : Buy

Target : | 657

Target Period : 12 months

Potential Upside : 11%

YoY Growth (%) FY09 FY10 FY11E FY12E FY13E

Total Revenues 20.4 16.8 18.1 18.5 18.3EBITDA 44.0 35.1 10.5 25.7 15.2Net Profit 43.1 26.1 21.2 21.2 19.5

Valuation Matrix (x) FY09 FY10 FY11E FY12E FY13E

PE 26.0 20.6 17.0 14.0 11.7EV/ EBITDA 17.3 12.5 11.4 9.0 7.6P/BV 7.7 6.0 4.7 3.7 3.0Target P/E 28.8 22.8 18.8 15.5 13.0Target EV/ EBITDA 19.1 13.9 12.7 9.9 8.4Target P/BV 8.5 6.7 5.2 4.1 3.3

Stock Data

Bloomberg Code TRP:IN

Reuters Code TORP.BO

Face Value (|) 5

Promoters Holding (%) 71.5

Market Cap (| cr) 5,00352 week H/L 624/400Sensex 18,970Average volumes 39,126 Price movement

200

350

500

650

800

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

4,000

5,000

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TPL (LHS) Nifty

Comparable return matrix (%)

Company 1 Month 3 Month 6 Month 1 Year

Torrent Pharma 4.0 4.2 3.9 45.1

Cadila Healthcare 10.5 19.4 33.0 94.8

Glenmark Pharma -8.8 2.2 15.7 15.7

Lupin 2.9 5.9 23.1 63.4

Sun Pharma 0.5 11.4 36.5 66.6 Analyst’s name

Siddhant Khandekar [email protected]

Krishna Kiran Konduri

[email protected]

ICICIdirect.com | Equity Research Page 2


Company Background Established in 1959, Torrent Pharmaceuticals Ltd (TPL) is a mid-sized vertically integrated pharmaceutical company with a strong presence in both domestic as well as international markets. TPL is part of the Torrent Group, having interest in power and power cables other than pharma. TPL is ranked 16th (by turnover) in the domestic formulations market with six of its brands among the top 300 brands in India. The company is a leading player in the key chronic segments such as cardiovascular (CVS) and central nervous systems (CNS) in India. In FY10, the chronic segments i.e. CVS, CNS and anti-diabetic contributed ~62% of TPL’s domestic formulation sales. During FY05-10, TPL’s domestic sales grew at a CAGR of ~17% to | 921 crore.

TPL’s international formulations business received a significant boost after the acquisition of Brazil-based Fornex Industrial Farmaceutica (in FY02) and Germany-based Heumann Pharma (in FY06). The company has also invested in new product applications in regulated markets like Europe (ex-Germany) and US. As a result, the share of the international business rose to 51% of sales in 9MFY11 (against 8% in FY02).

TPL has a presence in the contract manufacturing segment (10% of sales in 9MFY11), driven by its alliance with Denmark-based Novo Nordisk since 1992 to manufacture insulin formulations in India. TPL has manufacturing facilities in Indrad (Gujarat) and Baddi (Himachal Pradesh). The current employee strength is ~7,000.

Exhibit 2: TPL’s sales grew at 28% CAGR in FY05-10…

965

1,299 1,355

1,631

1,904

0

400

800

1,200

1,600

2,000

FY06 FY07 FY08 FY09 FY10

( | c

rore

)


Exhibit 3: …driven by growth in international formulations

0

600

1,200

1,800

2,400

FY06 FY07 FY08 FY09 FY10 9MFY11

( | c

rore

)

Domestic formulations International formulationsContract manufacturing


Exhibit 4: Domestic formulations break-up (FY10)

Others8%Anti-diabetic

7%

Anti-infective11%

Gastro-intestinal

19%CNS20%

CVS35%


Exhibit 5: Brazil generates ~1/3 of international revenues for TPL

4628 28 31 32 33 33

40 45 36 32 28 26

0 3 10 1215

11 11 13 13 133921 21 22 19 17 17

6

0

25

50

75

100

FY05 FY06 FY07 FY08 FY09 FY10 9MFY11

(%)

Brazil Germany (Heumann)USA Europe (excl Germany)Others


Share holding pattern (Q3FY11)

Shareholder Holding (%)

Promoters 71.5

Institutional Investors 16.4

Other Investors 7.0

General Public 5.1 Promoter & Institutional holding trend (%)

71.5 71.5 71.5 71.5 71.5

8.1 8.212.5 14.7 16.4

0

20

40

60

80

Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

(%)

Promoters FIIs & MFs



Investment Rationale We expect the international and domestic formulation businesses to be the main growth drivers. On the international front, we expect sales to grow at a CAGR of ~20% in FY10-13E on the back of new product launches in both advanced and emerging markets. In the domestic market, TPL is already a frontline player in some of the chronic therapies. It is planning to improve its presence in chronic therapies further with an aggressive product pipeline. We expect sales from the domestic market to grow at a CAGR of ~18% in FY10-13E. The recent out-licensing deals in the CRAMS space with two global players will also support sales growth. Overall, we project total revenues will grow at a CAGR of ~18% in FY10-13E. Exhibit 6: Sales break up

628729

8541007

1189

823947

1131

1363

1625

164 190 216 255 293

0200400600800

10001200140016001800

FY09 FY10 FY11E FY12E FY13E

Domestic formulation International formulation CRAMS


Expanding international business Strong growth to continue in international formulations

TPL has a significant presence in Brazil, Germany and a growing presence in the rest of Europe and the US. During FY05-10, international revenues grew at an impressive CAGR of ~47% to | 947 crore supported by a strong performance in Brazil (CAGR of 38%) and Europe (CAGR 43%). In FY08, TPL entered the US market and emerged as the second largest supplier of Citalopram and Zolpidem (both CNS) in a span of two or three years. As a result of a robust performance in international markets, the share of international formulations in the company’s total revenues increased to ~51% in 9MFY11 as against ~24% in FY05.

We believe TPL’s robust product pipeline in existing markets and strategic entry into new lucrative markets (Australia, South Africa and Thailand) will drive international formulation revenues, going forward. Consequently, we project TPL’s international revenues will grow at a CAGR of ~20% to | 1625 crore in FY10-13E.

Total revenues to grow at a CAGR of ~18% in FY10-13E

A robust product pipeline and forays into new markets is

expected to drive the growth in the international

formulations segment



Brazil continues to be a significant topline contributor New product launches fuel growth from Brazil

Brazil remains a key international market for TPL and accounts for nearly one-third of the total international sales (9MFY11). The company is one of the leading Indian generic drug manufacturers in Brazil with a market share of ~7% in the chronic segment. With a portfolio of 27 products focused on the high-growth CVS and CNS segments, TPL’s sales have grown at a CAGR of ~38% in FY05-10, in spite of tepid growth in FY10. The slow growth in FY10 can be attributed to slower product introduction and increasing pricing pressure.

In order to improve its growth prospects, the management has identified nearly 35-40 new products in existing therapies that are expected to be launched in the next three or four years. Currently, TPL is covering only 10% of the market and expects to increase it to 25% with these incremental product launches. TPL also plans to increase its field force in Brazil in order to support the product portfolio expansion.

With effective measures in place, we expect Brazil to remain a key market for TPL during our forecast period. We expect revenues from the Brazilian market to grow at a CAGR of ~20% to | 520 crore in FY10-13E.

Exhibit 7: Growth from international formulations to grow at a CAGR of ~20% between FY10-13E…

137

431615 597

823947

1,131

1,363

1,625

0

300

600

900

1,200

1,500

1,800FY

05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

( | c

rore

)


Exhibit 8: …driven by growth prospects from Latin America, US and Europe

4628 28 31 32 33 33 35 35

- 40 45 36 32 28 26 23 21-

- - 0 3 10 12 15 1715

11 6 11 13 13 13 12 123921 21 22 19 17 16 15 15

0

25

50

75

100

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

Latin America Germany (Heumann)USA Europe (excl Germany)Others


With 35-40 new product launches planned over the next

three or four years, Brazil will be a key growth driver for

TPL

Exhibit 9: Total ~40 new product launches anticipated in the next 4 years

19

8

40

0

13

25

38

50

Till FY05 FY05-FY10 FY11-FY15E

(Num

ber)


Exhibit 10: Revenue from Brazil projected to grow at CAGR of ~20% between FY10-13E

60116

167 177257

301361

434

520

0

125

250

375

500

625

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

( |cr

ore)




Mexico to add further strength to growth from Latin America

To increase its presence in Latin America, TPL recently entered the Mexican market. Mexico is the second-largest branded generics market in the Latin American region. Lower level of price competition (as compared to Brazil) further adds to the attractiveness of the Mexican market. The company will follow a similar growth strategy in Mexico as employed in Brazil with primary focus on the chronic segment. TPL plans to launch six products in the CNS segment in the current fiscal with a field force of 35 people and expects to gradually expand their portfolio with other chronic segments (CVS and anti-diabetic).

Further, TPL plans to launch ~30 new products in Mexico and increase the size of its field force to 200 people in the next three or four years. With a strong product pipeline in place, we project sales from Mexico will contribute ~2% of TPL’s international net sales by FY13E. Together with Brazil, the overall revenue from Latin America is expected to grow at a CAGR ~22% in FY10-13E.

Growing strength in developed markets

Strong growth to continue in the US

Although a late entrant, TPL has quickly garnered significant strength in the US market. Within three years, the contribution of the US market to TPL’s international sales has increased to 12% (in 9MFY11) from 0.3% (in FY08). The company maintains strong market share in two key products – Citalopram (28%) and Zolpidem (22%).

Till Q3FY11, TPL has a strong portfolio of 25 abbreviated new drug applications (ANDAs) approvals. Of these, only 11 were actively marketed while three are expected to be launched in Q4FY11E. Further, TPL’s ANDA pipeline consists of 28 pending approvals and 40 filings under development, which provides strong growth visibility for the company in the US market.

Driven by new product launches, Mexico is expected to

contribute ~2% of TPL’s international sales in FY13E

A strong product pipeline provides growth visibility from

the US generic market

Exhibit 11: Strong product pipeline in US provides growth visibility

14

3531

27

40

611

21

29 28

3 4

1116

25

0

10

20

30

40

50

FY07 FY08 FY09 FY10 9MFY11

(Num

ber)

ANDAs under development ANDAs pending for approval ANDAs approved




Drugs worth US$90 billion losing patent in 2011-16 The US will remain the most important market for Indian companies thanks to the sheer size of the market and the generic opportunities on account of the impending patent cliff. Between 2011 and 2016, drugs worth ~US$110 billion will lose marketing exclusivity worldwide. Of this, ~US$90 billion is in the US alone. Although price erosion and increase in competition will be a matter of concern, we believe Indian players, on account of vertically integrated model and proven capabilities and capacities, are best placed to fathom the price erosions among others. With close to 120 USFDA approved facilities (second only to the US) Indian generic payers will be the major beneficiaries of the so-called impending patent cliff. We believe Indian generic players have already smelled the opportunity and we could see the expediting of ANDA filings in spite of delays in getting approvals from the USFDA. From big players like Ranbaxy and Sun to smaller players like Natco, all are preparing themselves for this opportunity. We also see increasing first to file challenges by leading generic players over and above the normal Para IV filing. This will lead to growing out of court settlements given the high success ratio of Indian players (~70%). Exhibit 12: Impending patent cliff (US$ billion)

20 20

28 28 27

0

5

10

15

20

25

30

2008 2009 2010 2011 2012


Additionally, the new healthcare reforms proposed in the US are expected to increase health insurance coverage and promote the use of low cost medicines. This could translate into huge opportunities for companies sourcing from low cost manufacturing countries like India. In order to cater to such increased demand, TPL is setting-up a manufacturing facility at Dahej, Gujarat, which is expected to get commissioned by FY14E. We expect sales from the US market to grow at CAGR of ~44% in FY10-13E to | 269 crore. This will increase the share of US sales to ~17% of the company’s international sales in by FY13E (as against10% in FY10).

Indian generic payers will be major beneficiaries of the

impending patent cliff

We expect sales from the US market to grow at a CAGR of

~44% between FY10 and FY13E to | 269 crore



New products to revive growth momentum in Europe (excl Germany)

TPL follows a partnership based model in the European generic markets (excluding Germany). The company partners with large generic players by providing them with dossiers for off-patent products (resulting in one-time licensing income) and then procuring long-term supply contracts for such products. TPL has been pursuing growth in this market by aggressively registering new product dossiers over the last three years. The company submitted 34 new product dossiers in FY10 compared to 28 dossiers in FY09.

It is planning to increase its geographical reach through direct field force presence in Romania and the UK in the near term. Driven by growing product registrations and a strong pipeline of ~50 products proposed to be launched by FY15E, we maintain a positive outlook on revenue growth from Europe. As a result of these initiatives, we project revenues will grow at a CAGR of ~17% to | 185 crore in FY10-13E.

Exhibit 14: Growing number of product dossier registrations…

17

28

34

0

10

20

30

40

FY08 FY09 FY10

(Num

ber)


Exhibit 13: Revenues from US projected to grow at a CAGR of 44% between FY10-13E

228

91

128

192

269

0

60

120

180

240

300

FY08 FY09 FY10 FY11E FY12E FY13E

(| c

rore

)


Total ~50 new products proposed to be launched in

Europe by FY15E



Exhibit 15: …expected to drive revenue growth at a CAGR of 17% between FY10-13E

20

4839

64

101116

140

161

185

0

50

100

150

200

FY05

FY06

FY07

FY08

FY09

FY10

FY11

E

FY12

E

FY13

E

( | c

rore

)


Other markets present a mixed bag of opportunities and challenges

German formulation market remains a concern for TPL

TPL entered the German generics market by acquiring Heumann Pharma in FY06. The acquisition was expected to establish TPL’s presence in the German market by leveraging Heumann’s 90-year-old brand value. The company’s topline witnessed strong growth initially (59% YoY in FY07). However, the subsequent growth in revenues was dampened by the structural change in Germany’s generic drug market, majority of which (~70% in Q3FY11) was converted to a tender-based drug market controlled by government funded health insurance companies. This transformation in the market led to increased pricing power of insurance companies (vis-à-vis doctors and pharmacists) to do direct supply contracts at lower prices resulting in significant pressure on TPL’s profitability.

According to the management, TPL will attempt to counter the market dynamics and sustain competitiveness through the following measures:

• Catering to the increased demand from the tender business by aggressively bidding for upcoming tenders. In FY10, TPL successfully bid for tenders announced by a few large insurance companies such as AOK (five products), TKK (five) and IKK (nine)

• Total 12 new products proposed to be launched during FY12E in non-tender based product categories

• Restructure the operations with a significant drop in field force and transforming the operations to a variable cost based model

• To carry on the shifting momentum visible by shifting ~30% of production from Germany to India by FY09

In our view, the steps taken by the management suggest that TPL is realigning its business objectives according to the new market conditions. However, we remain sceptical of any significant turnaround in the Germany’s generic formulation market. As a result, we project TPL’s revenues from Germany will witness marginal growth at a CAGR of ~9% to | 330 crore in FY10-13E.

Growth prospects from the German market remain a

concern due to the uncertainty about Heumann’s ability to

turn around in the new environment



CIS including Russia and ROW markets

Economic condition continues to affect Russia markets

Operations in CIS, including Russia, were affected in FY10 due to adverse economic condition resulting in sales declining by 41% YoY although initially sales from Russia & CIS markets did grow at a CAGR of ~50% during FY05-09. Despite an improvement in sales in the first nine months of the current fiscal (up by 21%), we are conservative in our growth estimates due to uncertainty in these markets on account of reliance on distribution channels and the proposed reference pricing by the government. We estimate sales from the CIS including Russian markets will grow at a CAGR of ~11% in FY10-13E to | 54 crore.

Thailand to rekindle growth from rest of world (RoW) markets

TPL has a limited presence in many semi-regulated markets such as Sri Lanka, Philippines, Vietnam and Myanmar. In order to sustain its growth momentum in the ROW segment, TPL recently entered the Australia and South Africa markets and is planning to enter Thailand. Thailand’s generic formulation market is the second-largest pharma market in the South-East Asian region. With the adoption of universal insurance coverage policy by the government, growth in the generic formulations market is expected to increase in Thailand, creating substantial opportunity for TPL. In order to cater to the rising demand, TPL has identified a pipeline of ~45 molecules in CVS, CNS and anti-diabetic segments. TPL expects the contribution from Thailand to start as early as FY12. We project sales from RoW markets will grow at a CAGR of ~18% in FY10-13E to | 189 crore. Overall, sales from ROW markets and Russia & CIS market are expected to grow at a CAGR of ~17% to | 243 crore in FY10-13E.

Exhibit 16: Revenues from Germany expected to post muted growth between FY10-13E

169

268

210

257 255283

306330

0

100

200

300

400

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E( |

cro

re)


Thailand is expected to present significant growth

opportunity for TPL



Exhibit 17: RoW (inc Russia & CIS) to grow at a CAGR of ~17% in FY10-13E

51

87

125 127

154 153179

204

243

0

70

140

210

280

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

( | c

rore

)




Growth momentum in domestic formulations to continue

Domestic formulations to grow at 18% CAGR in FY10-13E

With ~40% share in gross sales in 9MFY11, the domestic formulations market remains a key contributor to TPL’s topline. In our view, the growth in the domestic market will be driven by existing therapeutic segments like CVS, CNS, anti-diabetic and newly added gynaecology segment. In terms of sales by value, TPL is ranked second in the CVS segment (market share of ~7%) and third in CNS segment (~6%) in the domestic market.

Further, the ramp-up in field force strength (~1,000 new employees in the last 15-18 months) and the focus of the management on improving its presence in Tier-I cities & metros and entering smaller towns and villages is expected to fuel topline growth for the company. The company launched 55 products (including line extensions) in FY10. In the first nine months of the current fiscal, 10 products (excluding line extensions) were launched and the company plans to launch four or five more products in the last quarter. Going ahead, TPL is planning to launch 20-25 products every year. Considering these key initiatives, we expect revenues from the domestic formulation segment to grow at a CAGR of ~18% in FY10-13E to | 1189 crore.

Chronic segments to drive domestic formulation business

The Indian domestic formulation market is in a transition phase with a growing shift towards chronic (e.g. CVS, CNS, anti-diabetics etc.) and super speciality (e.g. nephrology, oncology, etc.) therapies from traditional acute therapies. These therapies together accounted for ~20-25% of overall domestic formulations. Rapid urbanisation, changing lifestyles, demographic transition and growing health insurance coverage are some of the obvious factors that will drive the chronic growth. As a result, growth in chronic segments has outpaced the overall therapeutic segment by ~400 bps during the last five years.

TPL has significantly benefited from this trend given its early focus on chronic segments. As a result, the share of chronic therapies in the company’s domestic formulations increased to ~62% in FY10 vs. ~50% in FY01. TPL is planning to fill the portfolio gaps in these segments.

Exhibit 18: Domestic formulations segment to grow at ~18% CAGR in FY10-13E

333444

557 587 628729

854

1,007

1,189

0

300

600

900

1,200


( | c

rore

)


A leading position in the chronic therapy segments, an

improved field force and penetration in smaller cities will

drive TPL’s domestic formulation business

The share of chronic therapies in total domestic

formulations will remain high at ~65-70% in FY13E



In our view, TPL will continue to benefit from the growth opportunity in the domestic chronic therapy segments given its established market position and large portfolio of relevant products. We expect the share of chronic therapies to remain high at ~65-70% of total domestic formulation revenues in FY13E.

Exhibit 19: Focus on chronic segments to remain high by FY13E

Others35%

Anti-diabetic8%

CNS22%

CVS35%


Ramp-up in field force and improved reach recharges domestic formulations

In the last 18 months, TPL revived its field force strength with the addition of 1,000 medical representatives (total strength of ~3700 as on December 31, 2010), which helped the company to effectively market the 65 new products (55 launches in FY10 and 10 in 9MFY11) launched during the period. The new products launches resulted in domestic formulation revenues (gross sales) growing at ~16% YoY in FY10 over mere ~7% in FY09. With the help of the expanded sales force, TPL is planning to improve its geographical reach by targeting smaller towns as well as villages where the pharma market is expected to grow faster than the metros and Tier –I cities due to improving healthcare access.

Exhibit 20: Chronic segments growing faster than overall domestic market

0

8

15

23

30

FY05 FY06 FY07 FY08 FY09 FY10

(%)

CVS CNS Anti-diabetic Overall domestic market


With the addition of ~1,000 medical representatives in the

last 18 months, TPL is planning to improve its geographical

reach by entering small towns as well as villages



Exhibit 21: Significant increase in field force in FY10, 9MFY11

1,959

2,7862,954

2,761 2,812

3,364

3700

1,500

2,125

2,750

3,375

4,000

FY05 FY06 FY07 FY08 FY09 FY10 9MFY11

(Num

ber)


Exhibit 22: Trends in domestic market growth rate

-60

15

90

165

240

Q1FY

08

Q2FY

08

Q3FY

08

Q4FY

08

Q1FY

09

Q2FY

09

Q3FY

09

Q4FY

09

Q1FY

10

Q2FY

10

Q3FY

10

Q4FY

10

Q1FY

11

Q2FY

11

Q3FY

11

( |cr

ore)

-8

0

8

15

23

30

(%)

Domestic formulations revenue Growth rate (RHS)


Entry into new therapy areas to provide additional growth

In FY10, TPL expanded its therapeutic portfolio by entering the gynaecology segment (market size of ~| 2,400 crore in FY10) and introduced eight new products in the domestic market. According to the management, the company is planning to focus on the regular obstetrics and gynaecology market in the initial stages while an entry into the infertility market is expected in the latter stages. Also, TPL is planning to launch 11 new products in FY12. This, together with eight already launched products, will cater to ~40% of the total obstetrics and gynaecology market. Going ahead, the company is also planning to enter the respiratory and dermatology segments in the near future.

With a domestic market size of ~| 2,400 crore,

gynaecology presents a significant opportunity for TPL in

the near term



CRAMS

New manufacturing facility to drive growth in contract manufacturing segment

Since 1992, TPL is a preferred partner for Novo Nordisk to manufacture Human Insulin. The company imports raw materials from Novo Nordisk, converts it into Human insulin and deliver to Novo Nordisk (India). Novo Nordisk is by far the largest player in the human insulin space, both India as well as abroad. It has a market share of ~65% in the domestic market. To meet the growing requirement of Novo, TPL has commissioned a new human insulin formulation manufacturing facility in FY10 with a capacity of 26 million vials per annum. In 9MFY11, sales from the CRAMS business accounted for ~10% of total sales.

During FY10, TPL entered into two out-licensing deals with global players (Astra Zeneca and another undisclosed MNC). These arrangements will allow TPL to expand its presence in many emerging markets by leveraging its existing product portfolio. Under the Astra Zeneca deal, Astra Zeneca will market 18 products of TPL in nine emerging markets. The tie-up with the other MNC pertains to 50 products over 50 emerging markets. We expect sales to start flowing-in from the second half of FY13.

TPL’s revenues from the contract manufacturing segment have grown at a CAGR of 15% to | 190 crore in FY05-10. With streamlined production from the new facility and sales inflow from other two deals, we project the segment will continue to grow at a CAGR of ~16% in FY10-13E to | 293 crore.

Exhibit 23: Indian manufacturers partnering with global players to expand geographic reach Period Indian firm Global partner Characteristics of deal

May-09 Aurobindo Pfizer Supply of 70 products to the US, Europe and France and 60 products to more than 70 emerging markets

May-09 Claris Lifesciences Pfizer Supply of 15 injectibles to North America, Europe, Australia and New Zealand

Jun-09 Dr Reddy's GSK More than 100 drugs to be marketed in many emerging markets

Jan-10 Strides Arcolab Pfizer 40 oncology products to be distributed in the US

Mar-10 Torrent Pharma Astra Zeneca 18 products to be marketed in nine emerging markets

May-10 Cadila Healthcare Abbott 24 products (with an option to include 40 more) to be marketed in 15 emerging markets

Oct-10 Biocon Pfizer To commercialise diabetes treatment products in developed and emerging markets Source: Company, ICICIdirect.com Research



Significant capital expansion planned up to FY14E

In order to support the growth anticipated from new as well as existing geographies, the company has planned a significant capacity expansion in the next three or four years.

TPL has budgeted a capital expenditure worth | 135 crore for setting up a new formulation plant at Sikkim and | 771 crore for developing a facility in the SEZ at Dahej, Gujarat, which will primarily cater to the increased demand from India, the US and Europe. These facilities may also be utilised to support the production of supplies to Astra Zeneca in the future. With substantial free cash generation, we expect the company to fund a majority of its capex with a mix of debt and internal accruals.

Capital expenditure worth | 906 crore planned till FY14E

Exhibit 24: Planned capacity expansion worth more than | 900 crore

Location Nature of investmentEstimated cost

(| crore)Targetedmarkets Expected completion

Sikkim New formulations facility 135 Domestic FY12E

Dahej (SEZ) Formulations and API capacity enhancement 771 International FY14E

Total 906 Source: Company, ICICIdirect.com Research



Assumptions – Revenues

We expect the growth in the domestic formulations market to continue to remain strong, driven by TPL’s significant presence in the high-growth chronic segments. However, revenue growth in the international business (CAGR of ~20% in FY10-13E ) is expected to be higher than the domestic segment (CAGR of ~18% CAGR in FY10-13E) primarily due to good growth expected in Brazil and the US and improving reach in other attractive markets.

Exhibit 25: Assumptions – Segment-wise gross sales

(| crore) FY08 FY09 FY10 FY11E FY12E FY13ECAGR

(FY10-13E)

Domestic formulations 587 628 729 854 1,007 1,189 18

YoY (%) 5.5 7.0 16.1 17.1 18.0 18.0

Contract manufacturing 149 164 190 216 255 293 16

YoY (%) 25.8 10.0 15.8 14.0 18.0 15.0

Latin America* 177 257 301 368 461 552 22

YoY (%) 6.2 44.9 17.2 22.3 25.4 19.7

Germany (Heumann)* 210 257 255 283 306 330 9

YoY (%) -21.8 22.8 -1.0 11.1 8.0 8.0

USA* 2 28 91 128 192 269 44

YoY (%) 1,408.2 227.6 41.1 50.0 40.0

Europe (excl Germany)* 64 101 116 140 161 185 17

YoY (%) 63.4 59.1 15.1 20.3 15.0 15.0

Rest of world*# 127 154 153 179 204 243 17

YoY (%) 1.4 21.8 -0.7 16.6 14.4 18.8

Total International* 579 797 916 1,097 1,324 1,579 20

YoY (%) -3.3 37.7 14.9 19.8 20.7 19.2 * net sales, # ROW includes Russia & CIS Source: Company, ICICIdirect.com Research; *net sales



Risks and concerns Delay in approvals may cause a shortfall in revenue

A significant portion of TPL’s topline is expected to be driven by new product launches in the domestic as well international markets. Any unanticipated delays in receiving necessary approvals from the local authorities could alter our future revenue estimates.

Uncertainty in Heumann’s ability to turn around

In Germany, TPL witnessed a dull growth in its topline (CAGR of ~10% during FY08-10), primarily due to the shift in the market to tender-based buying. Although TPL is looking to improve the German business through multiple measures, we believe Heumann’s lack of experience in the new environment could lead to continued poor performance.

Significant topline exposure to exchange rate fluctuations

International formulations contributed to ~51% of total gross sales in FY10. Although TPL follows an active hedging policy for the US dollar and euro exposure, with continued emphasis on international business, TPL’s topline is exposed to unfavourable movement in exchange rates.

Price reductions under DPCO may impact revenue estimates

TPL’s domestic formulations segment contributed ~40% to overall gross sales, which remains exposed to price control under the Drugs Price Control Order (DPCO). Over time, the company indeed managed to restructure its product portfolio to minimise the number of products under price control (10% in FY10 vs. 23% in FY01). However, any unanticipated products addition in the coverage of DPCO could impact the company’s financials.

Loss of revenue due to attrition in sales force

TPL faces high attrition levels, particularly in its sales force. As witnessed during FY08-09, this could disrupt the smooth functioning of the company’s sales practices, leading to a loss of customers and sales and also increase in the cost of recruitment and training.



Financials Sales to grow at a CAGR of 18% in FY10-13E We project TPL’s total revenues will grow at a CAGR of ~18% in FY10-13E to | 3155 crore driven by strong sales growth anticipated from both domestic and international formulations markets. Aggressive product launches and entry into new geographies are expected to be key growth drivers for international formulations (CAGR of 20% in FY10-13E). In the domestic market, a strong presence in chronic therapies and increasing market penetration (primarily in small towns and rural areas) are expected to support growth (CAGR of ~18% in FY10-13E).

EBITDA margins to sustain at 21-22% level in FY11-13E

In FY10, EBITDA margins witnessed a robust expansion by ~325 bps YoY to 22.3% primarily due to the turnaround in the high-margin domestic business and improvement witnessed in German and US operations. Going forward, we expect margin accretion due to revenues from high-growth branded generics markets (India, Brazil, etc) and improving profitability in the US. However, we believe the expansion in margins will be neutralised by the initial losses anticipated from entry into new geographies (Mexico and Thailand), rising expenses due to the increase in field force and uncertainty about improvement in operations at Germany and Russia. As a result, we project the EBITDA margins will be range bound at 21-22% between FY11E and FY13E.

Exhibit 26: Sales estimated to grow at a CAGR of 18% between FY10 and FY13E

547

9651,299 1,355

1,6311,904

2,249

2,666

3,155

0

750

1,500

2,250

3,000

3,750


( | c

rore

)




High return ratios sustainable With a robust topline growth, stable margins and strong cash position to fund the capex plans, we believe TPL would be able to maintain its return ratios at current levels.

Exhibit 27: EBITDA margins to remain range bound

14.1

11.312.9

16.0

19.1

22.320.9 21.5

22.1

0

150

300

450

600

750


( | C

rore

)

10

14

18

21

25

(%)

EBITDA EBITDA margin (RHS)


Exhibit 28: High return ratios to be sustained in FY11-13E

10.3

14.1

19.621.7

26.029.1

26.729.1 29.4

15.5 15.3

24.7

29.331.8 31.2 31.1

29.728.3

5

13

20

28

35


(%)

RoCE RoNW




Valuations

TPL’s profits grew at a CAGR of ~36% during FY05-10E. With key initiatives like a strong product pipeline across the globe for the next five years, increase in field force to improve its presence in smaller towns and villages in the domestic market, filling product portfolio gaps in its key chronic therapies, expanding foot prints into new geographies and CRAMS business with two new MNC players, we expect TPL’s earning to grow at a CAGR of ~21% in FY10-13E. At | 591, TPL is trading at ~14x its FY12E EPS of | 42.2 and ~12x FY13E EPS of | 50.5. The stock is currently trading at ~40-45% discount to Sun, Lupin, Cadila and Glenmark (larger peers in the generic space). With strong growth anticipated from both the domestic and international markets and a strong balance sheet, we expect the gap to narrow in due course. Consequently, we have valued TPL at | 657/share at 13x FY13E EPS of | 50.5.

Exhibit 31: Peer valuation (FY12E)

M Cap (| cr) EV/Sales EV/E P/BV Base PE RoCE RoNW

Torrent Pharma 5,003 1.9 9.0 3.7 13.9 29.1 29.7

Cadila Healthcare 17,068 3.4 14.4 6.0 21.1 30.9 34.0

Lupin 20,596 3.0 14.9 7.0 18.8 25.4 25.8

Glenmark Pharma 8,946 3.0 10.7 3.1 15.2 20.0 20.5

Sun Pharma 50,361 6.8 19.5 4.6 24.8 18.9 18.5


We have valued TPL at | 657/share at 13x FY13E EPS of |

50.5

Exhibit 29: P/E band chart

0

200

400

600

800Ap

r-04

Oct-0

4

Apr-0

5

Oct-0

5

Apr-0

6

Oct-0

6

Apr-0

7

Oct-0

7

Apr-0

8

Oct-0

8

Apr-0

9

Oct-0

9

Apr-1

0

Oct-1

0

(|)

Price 12.9x 20.1x 5.8x


Exhibit 30: EV/EBITDA chart

0

2,000

4,000

6,000

8,000

Mar

-04

Sep-

04

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

(| c

rore

)

EV 8.7x 13.0x 4.3x




Exhibit 32: Profit & loss account | Crore FY08 FY09 FY10 FY11E FY12E FY13ETotal Revenues 1,355 1,631 1,904 2,249 2,666 3,155Growth (%) 4.3 20.4 16.8 18.1 18.5 18.3Op. Expenditure 1,144 1,328 1,494 1,796 2,097 2,499EBITDA 210 303 410 453 569 656Growth (%) 29.5 44.0 35.1 10.5 25.7 15.2Depreciation 39 42 48 66 95 114EBIT 172 261 362 387 474 542Interest 20 19 17 13 28 22Other Income -3 -41 20 9 12 14Extraordinary Item 0 -9 -18 0 0 0PBT 149 192 347 383 458 534Growth (%) 36.7 28.9 80.7 10.2 19.8 16.5Tax 14 8 116 88 101 107Rep. PAT before MI 135 184 231 295 357 427Minority Interest (MI) 0 0 0 0 0 0Rep. PAT after MI 135 184 231 295 357 427Adjustments 0 -9 -18 0 0 0Adj. Net Profit 135 193 243 295 357 427Growth (%) 44.0 43.1 26.1 21.2 21.2 19.5


Exhibit 33: Balance sheet | Crore FY08 FY09 FY10 FY11E FY12E FY13EEquity Capital 42 42 42 42 42 42Reserves & Surplus 467 609 789 1,023 1,301 1,634Shareholder's Fund 510 651 831 1,065 1,344 1,677Secured Loans 337 318 365 326 218 171Unsecured Loans 23 164 158 157 155 121Minority Interest 0 0 0 0 0 0Deferred Tax Liability 70 68 62 64 64 64Source of Funds 939 1,202 1,416 1,612 1,782 2,033Gross Block 613 680 769 1,069 1,269 1,469Less: Acc. Depreciation 164 191 243 307 398 509Net Block 450 489 526 762 871 961Capital WIP 82 53 110 120 120 120Net Fixed Assets 532 542 636 882 991 1,080Intangible Assets 20 23 15 11 7 3Investments 55 139 141 133 133 133Cash 118 230 388 302 270 344Trade Receivables 211 267 298 348 415 491Loans & Advances 76 158 114 125 149 176Inventory 231 265 324 342 413 482Total Current Asset 659 953 1,161 1,160 1,289 1,518Current Liab. & Prov. 334 466 550 589 654 717Net Current Asset 325 488 611 570 635 800Deferred Tax Assets 7 10 12 14 14 14Application of Funds 939 1,202 1,416 1,612 1,782 2,033




Exhibit 34: Cash flow statement | Crore FY08E FY09 FY10 FY11E FY12E FY13EProfit after Tax 135 184 231 295 357 427Depreciation 39 42 66 66 95 114(Inc)/Dec in Current Assets 15 -181 -49 -88 -162 -173(Inc)/Dec in Current Liabilities 55 130 84 40 65 63CF from operation 243 176 332 313 355 431

Purchase of Fixed Assets -123 -55 -152 -308 -200 -214(Inc)/Dec in Investments -54 -85 -2 8 0 0(Inc)/Dec in Minority interest 0 0 0 0 0 0(Inc)/Dec in Deferred Tax Liability 6 -1 -6 2 0 0(Inc)/Dec in Deferred Tax Assets 0 -3 -2 -2 0 0CFfrom Investing Activities -171 -144 -163 -299 -200 -214

Inc / (Dec) in Loan Funds 61 123 40 -39 -109 -49Inc / (Dec) in Equity Capital 0 0 0 0 0 0Inc / (Dec) in Share premium 0 0 0 0 0 0Adjustments in Reserve & Surplus -1 -3 8 0 0 0Others -35 -40 -59 -61 -79 -94CF from Financing Activities 25 80 -11 -100 -188 -143Cash generation during the year 98 112 158 -86 -32 74

Op bal Cash & Cash equivalents 21 118 230 388 302 270Closing Cash/ Cash Equivalent 118 230 388 302 270 344


Exhibit 35: Key ratios

(%)FY08 FY09 FY10 FY11E FY12E FY13E

Raw Material 36.1 33.7 31.2 32.0 32.7 32.7Employee Expenditure 17.7 16.2 17.2 18.1 17.4 17.4Effective Tax Rate 9.7 4.1 33.4 22.9 22.0 20.0

Profitability Ratios (%)EBITDA Margin 16.0 19.1 22.3 20.9 22.1 21.5PAT Margin 10.3 11.6 12.6 13.6 13.9 14.0

Per Share Data (|)Revenue per share 160.1 192.7 225.0 265.8 315.1 372.8Book Value 60.2 76.9 98.2 125.9 158.8 198.2Cash per share 14.0 27.2 45.9 35.7 31.9 40.6EPS 15.9 22.8 28.7 34.8 42.2 50.5Cash EPS 21.0 28.3 33.8 43.6 54.6 65.3DPS 3.5 4.0 6.0 6.2 8.0 9.5




Exhibit 36: Key ratios

(%)Return Ratios FY08 FY09 FY10 FY11E FY12E FY13ERoNW 29.3 31.8 31.2 31.1 29.7 28.3ROCE 21.7 26.0 29.1 26.7 29.1 29.4ROIC 9.1 11.5 12.8 12.7 15.1 16.2Financial Health Ratio

Operating CF (| Cr) 258 295 312 317 372 439

FCF (| Cr) 150 309 180 7 172 239

Cap. Emp. (| Cr) 869 1,133 1,353 1,548 1,718 1,969Debt to Equity (x) 0.7 0.7 0.6 0.5 0.3 0.2Debt to Cap. Emp. (x) 0.4 0.4 0.4 0.3 0.2 0.1Interest Coverage (x) 8.7 13.7 21.9 29.4 17.0 25.0Debt to EBITDA (x) 1.7 1.6 1.3 1.1 0.7 0.4DuPont Ratio Analysis PAT/PBT 90.3 95.9 66.6 77.1 78.0 80.0PBT/EBIT 86.9 73.7 96.0 98.9 96.6 98.5EBIT/Net Sales 13.1 16.4 19.7 17.9 18.4 17.8Net Sales/Total Asset 154.0 148.2 140.1 142.9 151.9 159.9Total Asset/NW 1.8 1.8 1.7 1.5 1.3 1.2

(x times)Working Capital FY08 FY09 FY10 FY11E FY12E FY13EWorking Cap./Revenues (%) 24.0 29.9 32.1 25.4 23.8 25.4Inventory turnover 68.0 57.0 58.6 56.2 53.5 53.6Debtor turnover 61.1 55.0 56.2 54.6 54.1 54.3Creditor turnover 69.7 65.0 68.9 72.0 71.9 68.4Current Ratio 2.0 2.0 2.1 2.0 2.0 2.1

(| crore)FCF Calculation FY08 FY09 FY10 FY11E FY12E FY13EEBITDA 210 303 410 453 569 656Less: Tax 14 8 116 88 101 107NOPAT 196 295 294 365 468 549Capex -116 -46 -149 -310 -200 -200Change in working cap. 70 59 35 -48 -97 -110FCF 150 309 180 7 172 239

(x times)Valuation FY08 FY09 FY10 FY11E FY12E FY13EPE (x) 37.1 26.0 20.6 17.0 14.0 11.7EV/EBITDA (x) 24.9 17.3 12.5 11.4 9.0 7.6EV/Sales (x) 3.9 3.2 2.7 2.3 1.9 1.6Dividend Yield (%) 0.6 0.7 1.0 1.0 1.3 1.6Price/BV (x) 9.8 7.7 6.0 4.7 3.7 3.0




RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

[email protected]

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January 27 2011 Torrent Pharmaceuticals Ltd (TORPHA)content.icicidirect.com/mailimages/ICICIdirect... · 2017-08-01 · Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 4,000 5,000 6,000 7,000