Torrent Pharmaceutical Ltd’s improvement in domestic revenue is notable amid the impact on domestic markets of lower prescriptions generated and the slowing pace of patients going to clinics. The firm’s growth of about 2% in domestic revenues was better than what the street had pencilled in. That result provided the shot in the arm to its stock, which surged about 10% on Friday.
In fact, the growth was better than some of its peers. “The domestic performance is particularly strong in context of peer growth, with Dr Reddy's domestic revenues declining 13% year on year, and most other peers so far reporting mid- to high-single-digit decline," said analysts at Kotak Institutional Equities in a client note.
While this is good, growth in some other markets was soft. The US was flat compared to the year-ago period. Given that there was an absence of new launches in the US and the general price decline in generics, the overall lower revenues were understandable. Some product categories sustained well in the US, which is encouraging.
Sales in other markets have also been impressive, but this could be a blip due to stocking up in some key markets. Torrent’s Brazil performance was muted, though. In the coming quarters, Torrent is expected to launch about 10 new products in the domestic market. It is also expected to see a few approvals in the US market.
Like most of Torrent's peers, lower sales and administration costs bolstered operating leverage, which was ahead of the street’s estimates. Torrent reported a sharp outperformance in earnings before interest, tax, depreciation and amortization. The Ebitda margin of 32.1% in Q1 was higher by about 300 basis points over the street’s estimates. A further boost to margins came from lower research and development expenses.
However, note that some of the selling expenses could bounce back in the coming quarters, particularly travel and sales promotion expenses. Hence, the margin profile may not be sustainable. Analysts also say that the domestic recovery could be offset by moderation in gross margin.
But the pharma sector has been outpacing the broader market due to its resilience in earnings even during the lockdown. This has also partly been the reason for the stock’s sharp jump of 60% since January this year. That has also driven its valuations higher than the rest of the market. The stock is quoting at about 23 times FY22 consensus earnings.
As such, some of the growth may already be priced-in. “Even as we like TRP's domestic compounding story, the recent run-up leaves limited room for upside," said Kotak's analysts in the report.