Torrent Pharma rated ‘Buy’ by BofA ML, says deserves higher valuation

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Published: February 27, 2017 2:37:08 AM

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.

Torrent Pharma, TRP, EPS CAGR, Branded generic business, Indian Pharma market, Ebitda margins, EPS stabilisation, Pharma Market, Pharma News, MedicinesWe 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.

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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

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