Dolat Capital recommended reduce rating on Torrent Pharma with a target price of Rs 2500 in its research report dated July 30, 2020.
Dolat Capital's research report on Torrent Pharma
Torrent reported its best ever quarter operationally led by huge cost savings as lockdown in India led to slowdown of marketing and promotional activities. With 85% of MRs back on the field we expect this to normalize in next 2 quarters. While Sales growth was in-line, gross margin at 73.4% (240 bps YoY) was a function of growth in branded markets. Further aided by lower fixed costs, EBITDA margin came in at 32% (our estimate: 26%). Though management refrained from giving guidance, the commentary was upbeat on outperforming market growth in India. Two of its key businesses, Germany and US, impacted due to SOPs and compliance issues are expected to be resolved by 2HFY21/FY22E. Nonetheless, we believe the focus should remain primarily on the domestic market, which is likely to account for 65% of its FY22E EBITDA, with US contribution expected to come down to 8% of FY22 EBITDA. While Torrent has delivered impressive growth in India led by synergistic acquisitions, we believe growth levers from India business has been captured largely and margins have peaked for Torrent as current valuation leaves limited room for an upside. Focus will now shift to growth and balance sheet de-leveraging (guided for debt reduction of Rs 10bn in FY21).
Though we maintain our estimates, we now value the company on an SOTP basis valuing the India business at 23x EV/EBITDA (Torrent’s ability to take continuous price hikes indicates its strong brand positioning), Brazil at 15x EV/EBITDA and RoW at 7x EV/EBITDA arriving at a target price of Rs 2,500 (vs Rs 2,195 earlier). We upgrade our rating one notch to REDUCE.
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