Torrent Pharma: Elder portfolio boosts prospects

Torrent Pharmaceuticals has been one of the star performers in the pharma space in 2014 making investors richer more than twice over. The company's market cap has crossed the $3 billion mark (Rs 18,300 crore), up from $1.3 billion (Rs 8,000 crore) during this period.

Investors have been buying the scrip due to strong growth in the US fuelled by a series of generic launches, traction in the Brazilian market as well as domestic growth with the acquisition of Elder

Pharma's branded formulation business. Further, the recent tie-up of the company with Reliance Life Sciences for marketing of three biosimilars which are at various stages of development/approvals in India is a positive. While biosimilars currently account for a small share of the overall pharma pie, Indian companies have been adding them to their portfolio to take advantage of a potential spurt in their sales in the future.

While the acquisition of Elder's business in India and Nepal was looked at with skepticism, things seems to be falling into place. The Street was initially concerned about the increase in debt, deal valuations and the low margin on Elder's products. Margins for Elder's product basket was at 16%, significantly lower than Torrent's 22-23%. However, the concerns were misplaced as the Rs 913 crore deal which was funded through a mix of debt and internal accruals did not cause much stress on the balance sheet.

On the profitability front, EBIDTA margins that came in at 24.7% in FY14 (21.7% in FY13) are expected to improve to 25.47% in FY15 as per estimates by Ambit Capital. The margin boost is expected to come from the Elder portfolio. Analysts at the firm feel that Elder portfolio yielded EBITDA margins of around 60 percent in the September 2014 quarter. Torrent's EBIDTA margins in the September 2014 quarter had come at 22.4% compared to 18.4% in the year ago quarter. The reason for the improved performance was continued price hikes, premium brand positioning and operational efficiencies. This lead analysts to upgrade growth estimates and EBITDA margins for the Elder business. Instead of the earlier estimates of a 7-8 year pay back, the period has been revised lower to 5-6 years.

The company's growth in the US continues to be strong with generic boost coming from products such as the anti-depressant drug Cymbalta. Analysts at Nomura citing an IMS report say that Torrent's trailing three months sales at the end of October 2014 at $64 million (Rs 384 crore) rose 74% year-on-year. Ex-Cymbalta, three months sales grew 25% y-o-y.

Brazilian market has been a key performer for the company for some time now. The geography that contributes 12-15 percent to Torrent's revenues is expected to keep the growth momentum going with estimates of a 20% uptick in FY15 as compared to 6.17 percent growth in FY14.

On the domestic front, Torrent's monthly sales improved significantly at 23.3% in November 2014, after decline in sales of 5.1% in October 2014. Surjeet Pal of Prabhudas Lilladher says that initially the company sales growth had suffered because of incorporation of Elder Pharma. For the overall entity, analysts at Morgan Stanley estimate that earnings will grow 22.5% annually over FY13-16.