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Torrent Pharma's strong domestic and foreign presence promises much

Profile

Torrent Pharmaceuticals Limited began operations as Trinity Laboratories in 1970. The company was renamed in the early 80s when its manufacturing facilities were set up. Today, Torrent is a dominant player in the cardiovascular (CV), and central nervous system (CNS) therapeutic segments and has achieved a significant presence in the gastro-intestinal, diabetology, anti-infective and pain management specialties as well.

Torrent exports to over 50 countries with more than 1,000 product registrations. The company is a recipient of several prestigious export awards.

Promoters

Torrent Pharma was established by U.N. Mehta. His son, Sudhir, is currently the company’s chairman. Torrent Pvt. Limited owns 51 per cent of the company, while the promoter group holds 71 per cent of the shareholding.

Investment Rationale
Strong Domestic Business

70 per cent of Torrent’s domestic formulations sales comes from three segments — CV, CNS and gastrointestinal. These segments witnessed a growth of 37 per cent, 22 per cent and 18 per cent respectively in the last quarter. This accounted for a total growth of 15.4 per cent, outpacing the industry’s growth by over three per cent. These business segments are expected to see further growth under the company’s plans to expand to tier II cities and rural areas.

Growth In Insulin Manufacturing

Torrent’s long-term contract manufacturing agreement with the Indian subsidiary of Denmark-based Novo Nordisk Domestic Formulations for the supply of insulin has generated steady revenues for the past few years. This business grew by an impressive 34.1 per cent in Q1FY10 and is expected to provide the company with a steady cash flow.

Impressive International Business

Heumann, Torrent’s German business, grew by 30.8 per cent during Q1FY10. Torrent has successfully managed to shift over 30 per cent of Heumann’s business to India. With further production shifts, Heumann’s gross margins and profitability are expected to rise in the times to come.

While Torrent’s Brazilian business grew by nine per cent, European business, excluding Heumann, grew by 26.9 per cent, but the Russian business declined by 12.5 per cent. The company is monitoring the situation in Russia very closely. It is also looking at expanding by doubling its product basket in Brazil and is targetting five new products in Europe. These efforts are to a certain extent likely to compensate the Russian decline and further escalate the company’s international presence.

Torrent’s US business witnessed robust growth as well, raking in revenues of Rs 19 crore in Q1FY10. The company, which has eight products in US, plans to launch another four, perhaps even five, in FY10 and has 22 ANDAs awaiting the US Federal Drug Administration’s  approval.

High Cash Reserves

The pile of cash the company holds in its reserves amounts to Rs 1,000 crore. While the company is not really looking out for acquisitions, but when and if such an opportunity arises, this sum can be useful. It can always serve as a cushion in hard times and to fast track growth during spikes in demand.

Risks & Concerns
Fall In Net Profits

Torrent’s reported net profit declined by 69.3 per cent in Q1FY10 pursuant to changes proposed in the Union Budget 2009 based on which minimum alternate tax (MAT) credit entitlement of Rs 53 crore recognised in earlier years was written off during the quarter. However, excluding MAT credit entitlement in both the quarters, the company’s profit after tax (PAT) grew by 55 per cent.

Drug Price Control Order (DPCO)

DPCO-controlled products have limited upside in revenues and margins. Approximately 10 per cent of the company’s domestic formulations revenues were subject to price control under the DPCO, 1995. In the event of expansion of list under price control, Torrent’s revenues and margins may get impacted.

Valuation

With better-than-expected Q1FY10 numbers, Torrent is believed to be on the right track for good revenue growth and significantly higher earnings growth. The company’s revenues are expected to show a compounded annual growth rate (CAGR) of 12.6 per cent over FY09-11E. Earnings are expected to show a CAGR of 14.2 per cent during the same period. At the current market price of Rs 265, Torrent is discounting its FY10E earnings by 8.4x and its FY11E earnings by 6.9x.

The article has appeared in the September issue of Wealth Insight magazine.