Edelweiss Research is bullish on Torrent Pharmaceuticals and has maintained buy rating on the stock.

Edelweiss Research report on Torrent Pharmaveuticals: 

Torrent’s Q4FY07 result was in line with our expectation with 38% and 213% Y-o-Y growth in sales and EBITDA respectively. The company reported net profit of Rs 288 million as against a loss of Rs 14 million in the corresponding quarter last year. As expected, EBITDA margin improved 175 bps Q-o-Q on account of improved performance of Heumann Pharma (Heumann) and Brazilian operations.

Sales across divisions were in line with our expectations, with domestic formulations continuing to show robust growth. Based on this, and our belief that Torrent’s Heumann and Brazilian operations will improve driving overall profitability, we continue to remain optimistic on the company.

We do not change any of our estimates and believe that the company’s EPS would grow39% over the next two years. At CMP of Rs 211, the stock trades at a PE of 13.6x on our FY08E earnings.

Outlook and Valuations:

Expecting significant margin expansion in the near term, we consider Torrent to be a sustainable growth story. With improvement in the company’s overall performance, its ROCE is also likely to improve from 17.4% in FY07 to 23.8% in FY09E. At CMP of Rs 211, the stock trades at a PE of 13.6x on our FY08E, which is attractive compared with peers. With improvement in sales growth, margin, and return ratio, we believe there is a strong possibility of PE re-rating. We maintain our ‘BUY’ recommendation on the stock.

Investment Theme:

We believe Torrent will continue to grow on the back of: (1) growth in its domestic formulations business (42% of total sales), (2) turnaround of Heumann by FY09, (3) significant improvement in Brazilian and Russian operations, (4) geographic expansion in the US and European markets with the same product basket, and (4) likely upsides from its discovery projects.

Key Risks:

Later than expected turn around of Heumann. Indian Rupee appreciation against USD can dent profitability, as 48% of total sales come from the international markets. Price cuts/control in domestic markets could have a negative impact. Increasing interest rates could negatively impact the company’s net margins.