Torrent Pharmaceuticals (TRP’s) 2QFY18 results missed estimates, and we continue to expect FY2018 to remain a wash-out given the pressures in the US business. TRP also announced the acquisition of Unichem’s domestic Pharma business for Rs 3,600 crore. While fully priced, the acquisition is a right capital allocation decision, as it plays to TRP’s strengths in the domestic market, with the segment now likely to contribute 44 % of FY2019 revenues and >60% of FY2019 EBITDA. ‘REDUCE’ with a revised target price of Rs 1,270.
Torrent Pharma’s 2QFY18 revenues missed our estimates by 8.4%, predominantly driven by disappointments in the US and Brazil. Domestic formulations revenues grew 22.4 % y-o-y, 7.4 % higher than our estimates, due to a combination of post-GST restocking, as reflected in 7 % y-o-y growth for 1HFY18. US revenues at $40 million, missed our estimate by $4 million, due to >15% pricing erosion on the base business. Brazil revenues declined by 24% y-o-y in the quarter, due to inventory adjustments in the trade channel, which resulted in one-off, unquantified write-offs, though in-market growth remained strong at 20 % y-o-y. EBITDA miss was lower at 6.4%, due to lower SG&A costs, which declined 11% y-o-y, partly led by netting off of excise. Lower other income meant that PAT miss was wider at 13 %.
TRP announced the acquisition of Unichem’s domestic pharma business for R3,600 crore in cash, or at 4.2x FY2017 price/sales and 19.5X EV/EBITDA, given our understanding of 22% EBITDA margins for Unichem’s domestic business. The acquisition will largely by funded by debt, with cost of debt likely to range from 8-9%, with the management guiding to cash EPS accretion from year-1, and EPS accretion in year-3. We have maintained that TRP’s US strategy is not scalable, and in that sense, though fully priced, we believe this acquisition is the right capital allocation decision, as it plays to TRP’s strengths in the domestic market. The acquisition willenable TRP to move its ranking in the domestic market to five from 13, and fill critical gaps in several key sub-therapies in its core focus areas of CV, CNS and GI. While the management has not provided any synergy targets, these are likely to be driven from improvements in field force productivity, though, the improvements will likely be gradual.