Analysts Say These Three Factors May Cap Torrent Pharma’s Growth

Analysts now see a limited upside citing lack of product pipeline and high valuations.

Shares of the Ahmedabad-based drugmaker jumped 49% in the twelve-month period compared with a 14-48% gain in domestic peers and a 17% rise in the benchmark BSE Healthcare Index during the period, according to Bloomberg data. The only other pharmaceutical company to have rallied more than Torrent Pharma is Divi’s Laboratories Ltd.

Torrent Pharma’s stock jumped more than 26% so far this year despite the worst selloff for equities in more than a decade triggered by the Covid-19 pandemic. That’s, however, in line with rising demand for certain drugs during the outbreak, sending pharma and healthcare stocks higher. The Nifty Pharma Index has gained 21% so far this year, while the BSE Healthcare Index is up 16%.

But the average of twelve-month price targets tracked by Bloomberg implies an upside of just 2.8% for Torrent Pharma. Of the 34 analysts tracking the stock, 11 have a ‘buy’ rating, while 10 recommend a ‘sell’. The remaining suggests a ‘hold’.

Here’s what led to the rally in Torrent Pharma and risks analysts have flagged:

What Aided Torrent Pharma’s Rally

Steady Margin

Torrent Pharma’s operating margin increased over the last four financial years, while that of peers either remained flat or declined.

“Other companies have volatile margin because of their presence in the U.S. While Torrent does have a presence in the U.S., it’s more of a domestic company,” Vishal Manchanda, Analyst at Nirmal Bang told BloombergQuint. “In the U.S., prices are competitive and that is one reason we don’t see margins fluctuating for Torrent.”

The company’s India business contributed 44% to its total revenue in the financial year ended March, according to an exchange filing. That’s followed by 21% from Brazil and Germany and 19% from the U.S.

Torrent Pharma’s focus on domestic market has been rewarded quite richly compared with players in the U.S market that are going through a challenging period, Surajit Pal, analyst at Prabhudas Lilladher, told BloombergQuint. Also, benefits from branded generic business that contributed nearly 60% to the company’s top line worked in its favour, Pal said.

Unichem Acquisition

Torrent Pharma had acquired the branded business of Unichem for India and Nepal in December 2017.

The drugmaker, in its exchange filing, said synergies of the acquired Unichem portfolio, incremental productivity and cost cuts drove margin in the quarter ended March. Torrent Pharma’s margin stood at 28.2% during the reported quarter against 25.5% a year ago.

According to JM Financial, a successful integration of Unichem products and significant price hikes in key brands drove the company’s domestic performance. The acquisition of Unichem’s domestic formulations business strengthened Torrent Pharma’s presence in key therapeutic areas of cardiology, central nervous system and gastrointestinal, the research house said in a note, adding high-growth chronic and sub-chronic therapies account for 75% of the company’s domestic revenue.

Potential Risks

Margin At Peak

According to Nirmal Bang’s Manchanda, margin expansion has a limited scope. “Most companies peak around 28% margin when they have largely domestic portfolio.”

Agreed JM Financial. Torrent Pharma is now approaching peak margins with limited room for further expansion, it said.

Lack Of New Products

Torrent Pharma’s manufacturing facility at Indrad, Gujarat received a warning letter from the U.S. Food and Drug Administration in October 2019, barring the company from getting fresh approvals for exporting to the American market. In March 2019, the company’s unit at Dahej—used to make products for the U.S. market—was classified as ‘official action indicated’, implying violations of good manufacturing practices.

UBS Global Research expects Torrent Pharma’s sales in the U.S. to decline in the financial year ending March 2021 due to lack of any large product launches. Also, the company expects the timeline of Dahej’s FDA re-inspection to be uncertain due to travel limitations amid the virus outbreak, the research firm said in a note.

According to Edelweiss Research, the disruptions caused by the Covid-19 may derail the company’s plans to make domestic growth more sustainable by way of product launches. Performance in the key markets is also expected to remain subdued in a post-virus environment, it said.

JM Financial expects competition in the domestic market to increase as large- and mid-cap peers are shifting focus back home amid pricing pressure in the U.S.

A slowdown in Brazil and Germany—Torrent Pharma’s biggest markets after India—is also expected to weigh on the company, both Edelweiss and JM Financial said.

JM Financial said depreciation of the Brazilian real and batch traceability regulations—identification of batches/lots of medicines to ensure fast product recall—are the major headwinds.

Expensive Valuations

Torrent Pharma’s stock trades at 34.5 times its 12-month forward estimated earnings, the second-highest among larger peers.

According to JM Financial, Torrent Pharma trades at a premium of 40% to its five-year average. The valuation premium, the research house said, is “untenable” with the risks to near-term growth remaining underappreciated

Edelweiss Research maintains its “reduce” recommendation on the stock as the current valuations factors in only the benefit and not the risks. It s the stock at 28 times its 2021-22 expected earnings per share.