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Torrent Pharma has integrated one more acquisition successfully – Curatio, which is now in base year of comparison and is growing well under Torrent Pharma. The stock has rallied 78 per cent in the last one year, which is more than the 48 per cent rally in Nifty Pharma. Torrent Pharma is expected to continue growing at the top-line coupled with margin expansion, delivering high earnings growth.
The stock now trades at 49 times one-year forward earnings compared with last five-year average of 35 times. The premium valuation following a strong rally last year should limit investors from adding new positions in the stock. We earlier recommended investors accumulate the stock in May 2022 and now we recommend holding the stock at the current levels as growth prospects are factored into valuations.
Top-line drivers
Torrent Pharma derives 73 per cent of its revenues from branded generics sold primarily in India (57 per cent of Q1FY25 revenues), and in Brazil (7 per cent), while Germany (10 per cent) and the US (9 per cent) have largely generic portfolios.
Indian segment reported revenue CAGR of 15 per cent in FY22-24. The period witnessed the integration of Curatio portfolio (acquired for ₹2,000 crore in FY23), which aided the above IPM (Indian pharma market) growth rate, which was around 8-10 per cent during the period. While a large part of the benefit is in the base, the company can still expect last-mile benefits of revenue synergies from the acquisition in FY25.
Torrent Pharma earlier had high sales force productivity, which was above ₹10 lakhs per MR (medical representative) per month. The recent acquisition and constant addition to sales force (currently at 5,700) in the last two years has impacted the measure, but is expected to bounce back in FY25. The expanded force is tasked with increasing market share in existing categories and drive new product launches. Torrent Pharma has also driven a consumer health division, which shifts appropriate products to the fast-growing over-the-counter (OTC) channel from prescription and currently has four products in the division.
Torrent Pharma can deliver 100-200 basis points (bps) higher growth than IPM, owing to its largely-branded portfolio. The company can generate 2-4 per cent each of volume and new product growth and 6-8 per cent pricing growth for an overall India segment growth of 10-12 per cent in the next two years.
Torrent Pharma is also focused on Brazil, which is similar to India, wherein branded generics can deliver growth. CNS, cardio and diabetes are the focus therapeutic areas currently with dedicated teams that have been built up and the company intends to launch two brands per year per team in the medium term. This should ensure a low-teens growth in the segment. Owing to cost competitiveness, Germany tender market should allow Torrent Pharma to secure contracts allowing for high single-digit growth in this region as well.
The US FDA inspections for Indrad plant are progressing with five observations recently and the Dahej plant has been cleared in the last year. The segment should witness five-six launches in the year allowing for the segment to return to growth in FY25.
Margin expansion
Torrent Pharma’s EBITDA margins have improved 280 bps in the last two years to 31.4 per cent in FY24 and the company expects to add another 50-100 bps in the next two years. Pricing is a big driver as the branded generics led operations allow for above-average price hikes compared with the industry. While lower API prices (which are in the base year of operations) may have driven the expansion as well, further rationalisation can be expected as cost of raw materials for APIs (crude and downstream chemicals) have been benign. The US’ return to growth allows for positive operating profitability in that segment, which has achieved breakeven in FY23-24 with full utilisation of US market facing assets.
The 15 per cent revenue growth in the last two years and continued growth at 10-12 per cent expected should add to the operating leverage as well, supporting margin expansion. The cost synergies from Curatio acquisition have also played out. But with further growth in the Curatio portfolio along with marginal improvement in combined sales force productivity, margin improvement or continuity at the current high level can be expected.
Valuation, financials
Torrent Pharma has de-levered from the debt-funded Curatio acquisition and is in line to reach its planned 0.4x net debt to EBITDA by FY25. Its leverage now stands at 0.65 times from 1.2 times prior to the acquisition. This should lower the finance expenses, and the company can further add to the bottom line as its tax structure is expected to reduce by 100 bps in FY25-26.
Overall, with the strong top-line growth and further improvement in operating margins, supplemented by finance and taxation gains, Torrent Pharma should deliver high earnings growth. The Bloomberg consensus estimates have already factored in 13 per cent revenue CAGR and 28 per cent PAT CAGR in FY24-26. The valuation has similarly expanded 40 per cent above average. With all the positives factored into expectations, new investors need to be on the sidelines to assess the progress. Existing investors can continue to hold the stock.
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