Q1FY24 Review: Torrent Pharma: Margins continue to surprise positively

8 Aug 2023 , 12:09 PM

Torrent’s Q1 Ebitda grew 17% YoY, in-line with IIFL Capital Services estimates, driven by a robust 9% organic growth in the base India business and 130/100bps YoY/QoQ expansion in Ebitda margins to 30.5% (vs IIFLe of 30%). While base India growth was partially impacted this quarter owing to sluggishness in the Gastro segment, analysts of IIFL Capital Services expect Torrent’s India sales to clock 11% Cagr over FY23-26. Execution in the acquired Curatio portfolio has also been ahead of expectations. With consistent double-digit growth in the Branded Generic markets of India/Brazil and scale-up in Curatio’s margins, they expect Torrent’s Ebitda margins to expand to 32% in FY26, which should drive 16% Ebitda Cagr over FY23-26. Analysts of IIFL Capital Services upgrade FY24-26 EPS by 4-7% to bake-in ~50bps higher margins & lower ETR. They value Torrent at 21x 2YF Ebitda (vs 26x target multiple for Mankind) to arrive at their TP of Rs2,400 (BUY, 17% upside). 

Organic India business grew 9% in Q1 and 10.5% adjusted for NLEM price cuts: 

Torrent’s India business (incl. Curatio) grew 16% (adjusted for NLEM price cuts) and 14.5% (on a reported basis) in Q1, with Curatio’s contribution being 5% points to growth. Per secondary data, Torrent’s 9% organic growth in Q1 was driven by volume/price/new launches contribution of -3/+7/+4.5% resp. While volume growth has been muted, traction on new launches has been robust with Torrent’s Sitagliptin ranking 1st amongst the generic brands. Torrent is also rolling-out its CHL initiatives for Shelcal nationally through a field force of 230 reps. 

Execution in the acquired Curatio portfolio has also been ahead of expectations, with Curatio growing 18% in Q1 and its Ebitda margins improving ~700bps vs pre-acquisition margins, with scope to drive further margin expansion driven by PCPM-led operating leverage. Improving coverage of pediatric and dermatologists has allowed Torrent to drive growth in Curatio with the key brand Tedibar growing >20%, while Curatio’s PCPM has improved to Rs5 lakhs vs Rs3.6 lakhs pre-acquisition. 

GMs expanded to 9-quarter high of ~75% in Q1 vs ~72% in FY23, driven by a better product/geographic mix and cost optimization. Mgmt expects GMs to sustain at current levels, and with Rs250m sales getting deferred in Brazil from Q1 to Q2, analysts of IIFL Capital Services believe that Torrent’s Ebitda margins will improve to 31% in Q2. With price hikes led growth in India/Brazil, further improvement in Curatio’s profitability, and better utilization of US plants, analysts of IIFL Capital Services find an upside risk to their 32% margin estimate for FY26.