We recommend buying Torrent Pharma and upgrade our target price by 40% to R1,429, as we expect price hikes in Shelcal to continue beyond FY17e, margin expansion and strengthening of India/Brazil/US franchise. We change our revenue estimates for the mix (higher for Elder/US and lower EU/RoW) but increase our ebitda estimates by 7% for FY16 and FY17. We now value Torrent at 23.4x FY16/17e EPS (versus 18.3x earlier). The stock is trading at a 15-20% discount to the large-cap average FY16e P/E, given average competitive positioning and lower RoCE. With Elder pricing, RoCE and margin improvement, and management focus shifting to profitability and returns, we argue for an in-line multiple. In our view, the stock deserves a re-rating led by improvement in return profile and growth.
Despite the near monopoly in the oyster calcium space, Shelcal is priced at a ~31% discount to chemical calcium products; we expect further price increases in FY15-18 after a 9% hike in September 2014. We upgrade our revenue growth estimates for the Elder brands from 15% CAGR over FY14-17e to 25% CAGR. Experts suggest that Elder products have an MNC-equivalent perception and hence can command a substantial premium to competition. AIOCD data also suggests that the portfolio had a premium positioning up to FY11.
We believe the Elder portfolio yielded ebitda margins of ~60% in Q2FY15. We now expect the Elder acquisition to be RoCE-accretive by FY18e with a payback period of 5-6 years.
Ambit Capital – Institutional