There are rising market concerns on the impact of the rise in raw material prices and limited pricing power, particularly in the generics segment, on pharma companies’ earnings. In this regard, we believe Torrent Pharma (TRP) is better placed vs. peers as ~ 60% of the company’s revenues come from branded generics, where the company can undertake price increases. Raw materials as a percentage of sales are currently low at below 30% and the dependence on China is ~25%, according to management.
We expect sales growth in the branded generics businesses in India and Brazil to sustain in low double-digit supported by price increases. In India, TRP faces less volatility as the dependence on COVID-19 and seasonal products is low vs. peers. In fact, the improvement in patient footfalls could drive the demand for chronic segments that account for ~60% of sales. TRP has demonstrated strong execution in India, achieving significant improvement in field force productivity and much lower attrition than the industry. We expect TRP to expand its field force and enter into new segments in due course to sustain growth ahead of the market.
Factoring in the impact of lower sales in the US and the impact of higher costs, we reduce our earnings estimates for FY22F/23F/24F by ~10-11%. We value TRP at 17.5x (unchanged) one-year forward Ebitda to arrive at our lower TP of Rs 3,202. The target multiple is in line with the current trading multiple of 17.3x one-year forward EV/Ebitda, on consensus estimates. We believe the valuation multiple is backed by strong cash flows, higher dependence on branded businesses and capital allocation discipline. TRP is currently trading at FCF yields of 3.4%/4.1%/ 4.7% on FY22F/23F/24F estimates. Our new TP presents an upside of 16% from current levels. Upgrade to Buy.
Key risks: slower than estimated growth in India, adverse regulatory development, and adverse currency movements.