Torrent Pharmaceuticals’ (TRP) Q4FY18 numbers were weak, with top line up 22%, on Unichem acquisition, and bottom line up 11%, on onetime reversal of deferred tax liability. Excluding Unichem, domestic sales grew 11%, implying that Unichem contributed Rs 170 crore to top-line in Q4FY18. In the US, acquisitions offset sustained pricing pressure. In Brazil, which is currently in the midst of strikes and an impending election, TRP was allowed to take negligible price increases.
Going forward, to make the Unichem acquisition earnings accretive by FY20, TRP needs to: i) arrest the decline in Unichem portfolio; ii) improve MR productivity; and iii) improve EBITDA margin from current levels of 18%. We believe the stock is fairly valued at current levels of 21.3x FY20E earnings, a 14% premium to the sector. Maintain ‘HOLD’ with TP of Rs 1,333. Domestic grew 11% YoY ex-Unichem, while US grew 9% YoY for the first time in nine quarters, mainly on acquisition of manufacturing facilities. In the US, TRP launched five new products in FY18 and re-launched one product from Biopharma. EBITDA margin remained at 21%.
PBT slipped 45% YoY, as depreciation (Rs 150 crore) and interest expense (Rs 120 crore) jumped 50% and 100%, respectively. Current depreciation does not include any impairment. Management guided that quarterly run-rate for depreciation and interest is likely to be representative for the full year. Management commentary suggests that current quarterly run-rate of Rs 1.7bn is the new base for Unichem’s revenue. We believe Unichem needs to clock revenue of Rs 2,000 crore and EBITDA of ~R500 crore to be earnings accretive. In order to achieve this, TRP will need to arrest declines in the acquired portfolio, boost MR productivity from the current Rs 4.8mn to pre-acquisition productivity of R6.2 mn, and improve EBITDA margin from the current 20% levels.