We initiate on Torrent Pharma (TRP) with Buy rating as we believe the current valuations do not reflect the strong visibility on the 21% EPS CAGR that is likely over FY17-20E.
We initiate on Torrent Pharma (TRP) with Buy rating as we believe the current valuations do not reflect the strong visibility on the 21% EPS CAGR that is likely over FY17-20E. In comparison to peers, TRP has limited downside risks to earning expectations as: (i) >60% of profits are from branded generic markets which have steady, secular growth features, (ii) US growth has upside risks from Dahej ramp-up and likely M&A/in-licensing. TRP has corrected ~30% over last 4 months due to erosion in US sales, which has bottomed out in our view. Though in our view TRP deserves a premium valuation, our PO of R1,700 (35% upside potential) is based on 20x our P/E FY19e, in line with 5 year sector average.
Branded generic business models deserve premium valuations: In our view, they have near consumer staples like behaviour: (i) significantly (3x-20x) higher realisations than generics, (ii) sticky market shares, (iii) higher visibility over growth expectations due to favourable EM demographics.
TRP expected to outpace domestic pharma growth: Our differentiated analysis along the key parameters of success shows that TRP is likely to outpace the Indian Pharma market growth due to (i) higher exposure (77%) to fast growing chronic/sub-chronic segments, (ii) ability to build brands, (iii) rising productivity of field force from R7.2mn to R9.6mn by FY19e.
You might also want to see this:
Margin expansion to be aided by operating leverage, mix: We believe that TRP’s Ebitda margins will bottom out in FY17e and could expand by 200 bps over FY17-20e aided by 180 bps expansion in gross margins due to better mix and operating leverage over fixed costs.
Key near term catalysts which could drive re-rating: (i) Margins, EPS stabilisation trend over next 2-3 quarters, (ii) ramp up in US launches, (iii) value accretive M&A or in-licensing for the US market, (iv) stronger growth in branded generic markets of India and Brazil.
—BofA Merrill Lynch