Torrent has reach, product-mix edge

The Indian pharmaceutical industry has been witnessing double-digit growth since the last few years. It is expected to grow at compounded annual growth rate of 13-15% over the next 5 years. This would benefit Torrent Pharmaceuticals, one of the leading mid-sized companies with strong market share in chronic segment.

Business: Torrent is engaged in manufacturing and sale of branded as well as unbranded generic pharmaceutical products in India and overseas markets. The Ahmedabad-based firm focuses on therapeutic formulations for cardiovascular (CVS), central nervous system (CNS), anti-diabetes, gastrointestinal, anti-infective and pain management areas.

Torrent’s business can be split into three segments — domestic formulations, contract manufacturing comprising sourcing, manufacturing and supplying insulin formulations under the third-party brand name), and international operations. These segments contribute around 40%, 10% and 50%, respectively, to its revenues.

Torrent has a strong presence in chronic segment with a 63% domestic market share, with CVS, CNS and anti-diabetes segments contributing 35%, 21% and 7%, respectively. Gastrointestinal, anti-infective and pain management segments account for 33% of domestic formulations revenues.

The company has a research & development team of around 600 scientists engaged in discovery research, generics and new drug delivery systems. Currently, Torrent has seven discovery projects in pipeline. It has filed 336 patents for new chemical entities in all major markets worldwide, of which 144 patents have been granted so far.

Torrent has planned capital expenditure of around Rs. 600 crore over 3-4 years for setting up new plants to increase production capacities. It plans to invest Rs 350 crore for the proposed formulation plant in the Dahej SEZ, which will cater to the US. Torrent has kept on hold its plans to set up Rs 100 crore unit in Pharmez SEZ in Ahmedabad.

Investment rationale: The domestic formulations market has been witnessing steady double-digit growth in recent years. Torrent, with a major (63%) share in high-margin chronic segment, is focusing on increasing its reach in tier-2 to tier-6 cities through its ‘Extra Urban’ initiative.

The wider product-mix focusing on both chronic and mass acute therapy segments, and expanded geographical reach will help drive revenues. Its contract manufacturing business catering to global healthcare major Novo Nordisk to manufacture human insulin would continue to provide steady revenues.

Torrent has started generating good revenues from Latin America and Europe. Further, it would benefit from new generic product introductions on patent expiry in coming years. Also, its US business is expected to be the major growth driver. The company is also planning to enter developing markets such as Indonesia and Thailand.

Torrent has a strong balance-sheet with debt-to-equity ratio of less than one, and has effectively managed its working capital.
Concerns: Torrent faces typical industry-specific risks such as failures, long duration and upfront costs involved in discovery projects and exchange rate fluctuations risk. It also faces regulatory risks in the domestic market.

However, the pharma company has balanced product portfolio to mitigate these risks.

Valuations: Torrent’d revenues would be driven by steady growth in its domestic formulation segment, increasing presence in developing markets, and huge opportunities on account of newer product introduction, and expiry of patents on large number of products in developed markets.

Its margins are likely to improve due to increased contribution from high-margin domestic chronic segment and improving margins in international business.

Torrent’s revenues are expected to grow at CAGR of 15% over FY09-FY11E and net profit at CAGR of 26% over the same period. At CMP of Rs 409.85, the company trades at a P/E of 13.91x & 11.77x its FY10E & FY11E earnings, respectively. In view of its diversified presence, favourable product-mix and strong balance-sheet, Torrent can be considered at current levels from medium- to long-term perspective.

Disclaimer: The writer does not hold any shares of the company.