Home / Markets / Mark To Market /  Torrent Pharmaceuticals’ India bet is yielding rich dividends

Acquisitions are loaded with risks, especially in the pharmaceuticals industry. But even with as many as five acquisitions in four years, Torrent Pharmaceuticals Ltd has navigated these challenges rather well. Revenues at the company have risen 9.5% per annum on average over the last four fiscal years, at a time when many Indian pharma firms hit growth headwinds in recent years. Tracking the growth in revenues, the Torrent Pharma stock on average gained 23% per annum in FY15-FY18. It continues to do well.

The stock is up 31% in the last one year as investors began to see the benefits of the company’s last acquisition—Unichem Laboratories Ltd’s India and Nepal brands business in December 2017.

Post the integration, revenue in the first nine months of FY19 rose 37%. The growth is driven by India where revenue grew 50%. The US also did well registering 54% growth. But unlike other major pharma firms, Torrent derives only a fifth of its revenue from the US. In comparison, 42% of revenue comes from India, making it a crucial market.

The management expects India to continue to clock double-digit growth rates. Market share gains in key brands and expansion in market presence are seen to be growth drivers. The stock is reflecting the optimism. At about 28 times FY20 earnings estimates, it is one of the expensive stocks in the pharmaceutical sector.

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But the question investors need to ponder over is if the earnings trajectory justifies premium valuations. Above- average industry growth rate, productivity improvement and expansion in margins will be key earnings drivers, point out analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd. “On back of strong growth in India and limited rise in overheads, we expect EBITDA margin to expand to 27.7% in FY21F from 25.2% in FY19F," the analysts said in a note. The brokerage firm estimates Torrent Pharma’s reported profits to rise 30% and 36%, respectively, over FY20 and FY21.

The company’s focus on branded products and chronic therapies has helped it outperform the industry. Not that it doesn’t face any risks. One is the threat of drug price controls in India. Second is the slowdown in Brazil, which is impacting sales. The US market continues to see pricing pressure in generic drugs. As Torrent Pharma introduces new products, cost management in a volatile business environment (in overseas markets) can be challenging and potentially weigh on profitability.

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