India growth crucial for Torrent Pharma’s health amid steep fall in volume

The country accounts for 44% of overall revenues

The Torrent Pharma stock had corrected 21 per cent from its February highs, before recovering lost ground, over the last couple of weeks. Among key concerns for the Street has been its domestic volume growth over the past year, regulatory worries, and valuations.

After its January numbers, analysts at Emkay Global pointed out the declining volume trend. “Torrent Pharma has now seen the fifth consecutive month of volume decline (9 per cent in January 2020). Though the company has managed to take price hikes, we believe this is not sustainable in the long term.”

Praful Bora and Rajat Srivastava of the brokerage believe the company’s top brands — Shelcal and Losar H — continue to witness steep volume decline.

However, the company — which gets a majority of its revenues from chronic therapies — posted 17 per cent growth in February, thus outperforming the pharma market’s 12 per cent growth.

This was largely driven by higher prices, up by 8-9 per cent. It will be interesting to see if the company is able to sustain domestic growth, given it is the biggest market, accounting for about 44 per cent of revenues.

A key concern for the Street is the resolution of regulatory issues at the Dahej and Indrad facilities, which will enable it to launch its high-value products in the US.

Analysts believe that the US business (about a fifth of sales) could decline with the US FDA’s Warning Letter on Indrad/Levittown facilities, as well as official action initiated against the Dahej Plant. While a re-inspection for Dahej has been scheduled for mid-CY20 and for Indrad by end-CY20, any adverse outcome from these would be negative for the company.

Valuations, too, are in the expensive zone. At its current price, the stock is trading at 33x its one-year forward earnings estimates, as compared to its five-year average of 23x.

Analysts at Motilal Oswal Financial Services believe the firm’s premium valuations are linked largely to its domestic business, where pricing-led growth is unlikely to sustain.

Further, with most of the margin gains on account of the Unichem acquisition having been factored in, there might not be more gains hereon.