Torrent Pharma's domestic show remains strong, brokerages turn positive

Progress on US sales will be key for further Torrent Pharma's stock gains

The stock of India’s sixth largest pharma company by market capitalisation shed about 19 per cent post its December quarter results (Q3FY22) in January to its lows in mid-February. The sell-off in Torrent Pharmaceuticals was due to a weak performance in the US generic business and muted near term outlook.

Motilal Oswal Research cut its earnings estimates for FY22/23/24 by up to 13 per cent after the result. This was due to a lack of new product approvals, severe price erosion in the US base business, weak demand at the industry level, higher competition delays in Germany and increased logistic costs.

The stock, however, has seen some recovery in the past few weeks on the back of robust India business and attractive valuations which led to price upgrades. The company continues to outperform the broader market in the domestic formulation segment.

While the Indian pharma market sales in February was flat y-o-y in February, Torrent Pharma posted a growth of 7.6 per cent y-o-y. Barring one quarter last year, the company has been outperforming the broader markets for the last eight quarters.

The company whose sales in the Indian market stood at Rs 5,400 crore over the last 12 months has grown 16 per cent during this period and is ranked eighth in domestic sales with a market share of 3.2 per cent.

After the recent price fall and the fact that 45 per cent of overall sales come from the Indian market, some brokerages have turned positive.

Says Saion Mukherjee of Nomura Research, “In the current highly volatile macro environment, we see Torrent Pharma as a defensive stock with favourable risk-reward, particularly after the correction in the stock.”

The reason for this stance is the increasing contribution from India formulations, positive impact of likely price increase in the branded markets and relatively low base effect due to Covid-19 demand. The brokerage does not see a material impact from currency movements following the recent geopolitical developments.

While the India outperformance is positive, investors should await progress on plant resolution and improvement US price erosion trends before considering the stock. At the current price, the stock is trading at 33 times its estimated FY23 earnings estimates.