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Torrent Pharmaceuticals - Sweet Pill

This pharma major is poised for growth and is also attractively valued

Torrent Pharmaceuticals is the flagship company of Torrent Group. The company manufactures and sells branded as well as unbranded, generic pharmaceutical products. It is a prominent player in therapeutic areas such as cardiovascular (CV) and central nervous system (CNS).

Strengths
Good Q2 results: The company derives its revenues from domestic formulations, international operations and contract manufacturing. During Q2FY11, the domestic formulation business recorded sales growth of 22 per cent year-on-year (y-o-y). The contract manufacturing space (in India) registered a sales growth of 16 per cent y-o-y. However, net profit for the quarter was Rs 76 crore compared to Rs 74 crore in the corresponding quarter of the previous year, showing a growth of only 3 per cent.
Leadership position: It is one of the leading players in the Indian pharmaceutical industry. It has leadership position in some of the key therapy areas such as cardiovascular and neuro-psychiatry.
Wide geographic spread: The company’s current international operations are spread across five zones: Brazil and Latin America, Europe, Russia and CIS countries, North America, and rest of the world. It recently entered the Mexican market. It plans to enter UK and Romania shortly.

Growth and opportunities
The US is the world’s largest generic market. Torrent has begun to reap the benefit of its investments in the US market. Revenue from its US operations was Rs 94 crore in FY10 compared to Rs 29 crore in FY09. Although Torrent was a late entrant in the US generic market, it has been successful in acquiring a respectable market share. During Q2FY11 the company filed 51 abbreviated new drug application and 20 drug master files with the US FDA. Significant investments in product development are being made to support the build-up of US, Europe and Brazilian operations.

Concerns
Sectoral concerns: In the Indian pharmaceutical industry fewer products are now available for introduction due to the patent regime that came into effect in 2005. The business environment will continue to remain challenging, characterised by intense competition, margin pressures and regulatory interventions.
Attrition rate: The company faces a high level of attrition, particularly in its sales force, research and development technical staff, and production technical staff. This could lead to project delays and disruption, loss of customers and sales, and increased expenditure on recruitment and training.
Overseas market: In Brazil, where the company sells branded generics, competition from pure generics could adversely affect its branded business. Price erosion continues in the German generic market leading to shrinking of operating margins.

Valuations
Over the last five years, the company has been able to increase its return on net worth by a significant 14 percentage points.The stock is trading at a trailing twelve month price-to-earnings (PE) ratio of 14.85 (as on December 8, 2010). It is trading only slightly above its five-year median PE of 14.52.
The company’s earnings per share has grown at a five-year compounded annual rate of 40.2 per cent. Hence the price-earnings to growth ratio (PEG) of the stock comes to an attractive 0.4. You may buy this stock with at least a three-year investment horizon.