Torrent Pharmaceuticals draws up plan to reduce dependence on US

Company to draw 47% of revenue and 67% of Ebitda from Indian business by FY20

With Unichem in its kitty, Ahmedabad-based Torrent Pharmceuticals is likely to draw around 47 per cent of revenues from the domestic business by 2019-20, feel analysts. The company would draw most of its profits from India too - the Ebitda contribution from Indian business is expected to improve to 67 per cent by then, compared to 10 per cent share from the US. 

In 2016-17, the share of India business in Torrent's turnover was 34 per cent, while in 2017-18, the share is expected to rise to 38-40 per cent. As such Torrent Pharma is a strong player in the domestic formulations business, particularly in the chronic segments. It acquired a portfolio of 120 brands from Unichem's India and Nepal business in November last year.

Analysts feel that driven by margin improvement in the Unichem portfolio, Torrent would enjoy a 23.1 profit after tax CAGR over 2017-18 to 2019-20. 

Torrent's high margin formulations businesses are in India and Brazil (branded businesses). These had a revenue contribution of 46 per cent in 2016-17. Analysts expect this to rise to 58 per cent by FY20. In contrast, the contribution of US generic business would reduce to 16 per cent in FY20 from 23 per cent in FY17. 

Sources indicated that the company is working towards a strategy such that price erosion and volatility of the US business does not affect its growth prospects in the coming years. "Unichem acquisition helps in the overall de-risking strategy by increasing our share in the branded business," admitted a Torrent spokesperson. He, however, added that Torrent continues to remain focussed on its four key markets - India, Brazil, US and Germany. 

"India and Brazil are branded generic markets which provide a high level of sustainable growth. Torrent is also able to succeed in cost competitive generic markets like US & Germany. While there is a strong variability in the US market, Torrent has demonstrated consistent double digit growth in Germany," he reasoned. 

The US contributed 40 per cent to Torrent's turnover in FY16. In 2016-17 this share shrunk to 23 per cent. Analysts expect this to further contract t 18 per cent in 2017-18. 

Amey Chalke, analyst with HDFC Securities, felt that while Torrent would focus on the domestic business as a longterm strategy, but going by their interest in Sanofi's EU assets, one may think that if a tempting opportunity comes up in the US, the company may go for it. "They would be careful not to stretch their balance sheet by taking on too much debt, and also analyse if the target company would take too long (3-4 years) to turn around. But, if they can pull off a good deal that starts contributing to cash flow soon, Torrent may consider buy-outs in the future too," Chalke said. 

In a recent report, ICICI Securities has said that the consolidation of the acquired branded formulations business of Unichem would increase the contribution of domestic branded formulations business to total revenue and Earnings before interest, tax, depreciation and amortisation (Ebitda) significantly and hence, would provide higher sustainability of revenue and operating profit. 

"The volatility in revenue growth and profitability margins would reduce. We believe that Torrent would be able to gradually improve the Ebitda margin of acquired business from a current 22 per cent to 32 per cent by FY20," the report said. The acquired business of Unichem had a revenue of Rs 8.4 billion in 2016-17 and Rs 4.4 billion the first half of 2017-18.

Torrent has already deployed its executives to lead the medical representatives of Unichem, who have lower productivity. The Unichem integration, however, would be more challenging compared to the Elder deal (Torrent has more than doubled Elder's portfolio that it had acquired). Chalke said that as Unichem's business was slow growing, it would take a while before the results start showing on the immediate cash flow. 

India Infoline said in its recent review of the company that Torrent intends to grow the Unichem portfolio at least at par with market growth. "Bulk of the synergies from the acquisition are expected to accrue through rationalisation of the field force or divisions. The 90 per cent prescriber overlap between Torrent's 3,000 and Unichem's 2,000 sales representatives would provide enough levers for the company to reduce the field headcount," IIFL said. 

Additionally, there are some integration opportunities between Torrent's 17 and Unichem's 11 domestic divisions.