Stock Update

Torrent Pharmaceuticals Ltd

Emphasis on achieving sustainable growth across geographies
Powered by the Sharekhan 3R Research Philosophy Pharmaceuticals Sharekhan code: TORNTPHARM
Reco/View: Buy  CMP: Rs. 1,506 Price Target: Rs. 1,770 

Annual Report Review

3R MATRIX + = -
Right Sector (RS) ü á Upgrade  Maintain â Downgrade

Right Quality (RQ) ü Summary

Right Valuation (RV) ü Š Torrent Pharmaceuticals Limited (Torrent) has emphasised on achieving sustainable and
profitable growth going ahead in its annual report for FY2022.
+ Positive = Neutral – Negative Š The annual report mentions about a strategic framework and theme, which are expected to
drive the company’s growth going ahead.
What has changed in 3R MATRIX Š Torrent sees a healthy outlook for India as well as the Brazil business, backed by expanding
reach, market share gains, new product pipeline. It aims to outpace the Industry growth in
Old New both these markets, while the performance of the US business is likely to be under stress
RS á Š The stock price has corrected ~9% from its 52-week high and due to positive outlook for
India and Brazil businesses, we re-iterate Buy with an unchanged PT of Rs. 1,770.
RQ á
In its annual report for FY2022, Torrent Pharmaceuticals Limited (Torrent) has emphasised
RV  on achieving sustainable and profitable growth going ahead. The annual report mentions a
strategic framework and theme, which are expected to drive growth ahead for the company.
Management has identified six pillars that provide a clear path to implement the growth
strategy. Moreover, investments towards developing new markets into future growth
engines as well as emphasis on improving operational performance bode well from a growth
ESG Disclosure Score NEW perspective over the long term.
ESG RISK RATING Š Emphasis on creation of sustainable and profitable growth across geographies: Torrent’s
Updated Feb 08, 2022
38.10 annual report mentions about a strategic framework and theme, which are expected to
drive the company’s growth going ahead. Torrent has identified several objectives under
High Risk its mission and vision, which would support the strategy of the company – that of long-term
sustainable growth. The company has bifurcated the objectives into six strategic pillars,
NEGL LOW MED HIGH SEVERE which provide a clear path to implement the growth strategy. Growth across geographies
would be driven by achieving market share gains and expansion in existing therapy areas in
0-10 10-20 20-30 30-40 40+ core markets as well as in new markets.
Source: Morningstar Š Focus on new markets with a perspective to develop these into future growth engines:
Torrent is investing in newer growth markets, in addition to the existing core markets.
Company details These would either be done by expanding the company’s presence in existing markets or
by tapping in new markets. Torrent looks to leverage its existing product pipeline to scale
Market cap: Rs. 50,959 cr up and strengthen its presence in other existing growth markets, venture into new markets
by pivoting the already-proven business model, and go-to-market strategies from existing
52-week high/low: Rs. 1,652 / 1,243 markets. Overall, this would enable Torrent to develop these markets as future growth
engines, though these seem to be medium to long-term strategies.
NSE volume: Š Efforts to improve quality, productivity, and cost competitiveness to drive operating
2.2 lakh
(No of shares) performance: As part of the strategic initiative to improve cost competitiveness and improve
operational performance, Torrent intends to focus on productivity enhancement and cost
BSE code: 500420 competitiveness across functions, ensure supply continuity, and optimise research and
development (R&D) efficiency by building a market-centric portfolio. The above parameters
NSE code: TORNTPHARM would enable the company to improve its operating performance and drive its operational
excellence.
Free float:
9.8 cr Our Call
(No of shares)
Valuation – Focus on achieving sustainable and profitable growth; Re-iterate Buy: Torrent in
its annual report has highlighted a strategy to create sustainable and profitable growth across
Shareholding (%) geographies and therapy areas, which could support the company’s growth over the medium to
long term. Torrent sees a healthy outlook for India business, backed by expanding reach, market
Promoters 71.3 share gains, and likely traction in new trade generics division. Expected healthy growth in the
existing portfolio, likely outperformance to the industry, and new product launches would drive
FII 11.0 Brazilian sales growth, while elevated cost pressures, price erosion, and delays in re-inspection
for plants by USFDA could slow down US growth momentum. At the CMP, the stock trades at
DII 10.1 32.9x/27.8x its FY2023E/FY2024E PE, respectively. Further, the stock price has corrected ~9%
from its 52-week high and due to positive outlook for India and Brazil businesses, we re-iterate
Others 7.7 our Buy recommendation on the stock with an unchanged price target (PT) of Rs. 1,770.
Key Risks
Price chart
1. Delay in resolution of USFDA issues at its plants; and 2. Any adverse change in the regulatory
1650 landscape can impact earnings prospects.
1575
Valuation (Consolidated) Rs cr
1500
Particulars FY2021 FY2022 FY2023E FY2024E
1425
Net sales 8005.0 8508.0 9383.0 10401.5
1350 Operating Profit 2485.0 2431.0 2861.8 3328.5
Nov-21
Sep-21
Jul-21

Jan-22

OPM (%) 31.0 28.6 30.5 32.0

Adjusted net profit 1252.0 1262.0 1557.2 1842.0
Price performance EPS (Rs.) 36.8 37.1 45.8 54.2
(%) 1m 3m 6m 12m PER (x) 40.9 40.6 32.9 27.8
EV/EBIDTA (x) 22.4 22.6 19.2 16.1
Absolute 9.2 5.5 -5.5 0.4
P/BV (x) 8.6 8.5 7.3 6.2
Relative to
3.1 10.2 4.8 -3.4 ROCE (%) 16.9 18.4 23.1 26.1
Sensex
RONW (%) 23.1 21.1 23.9 24.2
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

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Key Highlights from Annual Report FY2022:

Torrent has released its annual report for FY2022 and the report emphasises on achieving sustainable and
profitable growth going ahead. The annual report mentions about a strategic framework and theme, which
are expected to drive the company’s growth going ahead. With this objective in focus, the company has
enhanced its strategic framework. The new/integrated strategic framework will not only boost business and
financial objectives but equally support the environment and society.
Torrent has identified several objectives under its mission and vision, which would support the strategy of
the company – that of long-term sustainable growth. The company has bifurcated the objectives into six
strategic pillars that provide a clear path to implement the strategy. For integrating sustainability, a new
pillar, Responsible Action, has been introduced for increasing the long-term efforts in this direction. There
are focus areas identified under each strategic pillar, which helps the company in effectively implementing
the framework and enhance the process of covering various aspects of sustainability and increasing the
boundary for creating an impact.
Integrated Strategy Framework

Source: Company, Sharekhan Research

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Over view of Strategic Theme

Source: Company, Sharekhan Research

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Strong presence across therapy areas to drive growth for India business: India is one of the core markets for
Torrent and constitutes around 50% of the company’s overall revenue and comprises domestic formulations
as well as CDMO operations. Moreover, of the total India business, around 70% of revenue is from branded
generics, while the balance 30% is from the generics business. Torrent has an established presence in the
Indian market and is one of the leading players in the domestic formulations space with an overall 8th rank
in Indian pharmaceutical markets (IPM) and has established a track record of growing faster than IPM. With
respect to therapies, the company has a higher presence in the chronic and the sub-chronic segments, which
together constitute around 75% of India sales. Torrent ranks amongst the top 5 across cardiovascular, VMN,
central nervous system (CNS), and gastro-intestinal therapy areas.
India Business: Sales – Sales Growth IPM Growth Trends
7000 16 16%

6000 14 14%
12 12%
5000
10
4000
10%
8
8%
3000
6
6%
2000
4
4%
1000 2
2%
0 0
FY2020 FY2021 FY2022 FY2023E FY2024E 0%
Sales (Rs Cr LHS) Growth % (RHS) 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

For FY2022, IPM has exhibited resilience and growth was subdued at around 2%, largely attributable to
disruptions on account of COVID-19, which impacted performance of acute therapies largely. However, as
Torrent has a higher presence in the chronic segment, it was able to comfortably outpace IPM growth. Going
ahead, a slew of growth triggers is expected to drive performance of India business. Reports suggests double-
digit growth in IPM going ahead, owing to several demand levers. With rising prevalence of chronic diseases,
a significant push towards increasing healthcare coverage towards a large set of the population coupled with
government support and insurance coverage and volume growth in IPM across all therapies is more than
likely to sustain this momentum in the near term and even increase over the medium term. Torrent would be
focusing on increasing prescription share and building bigger brands, introduce new products, and sustain its
competitive position in anchor therapies and build a presence in therapies that offer head room for growth. In
FY2023, the industry is anticipated to come back to double-digit growth by the second half of the year and
Torrent is likely to continue outpacing the industry’s growth.
Revenue Mix (%)
60%

50%
50% 47%

40%

30%

20% 16%
13% 13%
11% 10% 10%
8% 9%
10% 6% 7%

0%
India US Germany Brazil Other Countries others
2020-21 2021-22

Source: Company, Sharekhan Research

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US business to stage gradual improvement going ahead: Torrent’s revenue from the US business has been
on a declining trend and has dropped by 15.4% for FY2022 to Rs. 1,067 crore, which is a third consecutive year
of decline. US business has been under severe stress, as two of its key plants catering to US markets – Dahej
and Indrad – have been under USFDA scrutiny. This had an impact on the company’s base business as well
as on new product launches, with new launch momentum hitting severely as the new approvals are on hold till
the plant clears USFDA inspection. However, in the US, Torrent has a commendable position with 10.5% share
of covered markets, down from 13% in the previous year. In its space of 26 products, the company is ranked
among the three top players in US markets.
US Business: Sales – Sales Growth
1600 20.0

1400 15.0

1200 10.0

1000 5.0

800 0.0

600 -5.0

400 -10.0

200 -15.0

0 -20.0
FY2020 FY2021 FY2022 FY2023E FY2024E
Sales (Rs Cr LHS) Growth % (RHS)

Source: Company, Sharekhan Research

Going ahead, management sees the US business to stage an improvement. Brand loss of exclusivity, gradual
diversification of product portfolio moving up the value chain in favour of complex generics specialty products
biosimilars, and immune therapy would aid growth. The US market is expected to grow by 3-6% per year,
backed by growing incidence of chronics, faster approvals of generics drugs, and loss of exclusivity, which
offer an opportunity to scale up US revenue. Overall, due to higher-than-expected competitive intensity, lack of
new product approvals flowing in due to delayed regulatory clearance in Dahej and Indrad, and performance
in US markets could be under stress in the near to medium term, but over the long term, a strong product
pipeline comprising 57 ANDAs pending approval and 5 tentative approvals provides ample growth visibility.

German markets to be muted in the near term; Brazil to stage double-digit growth: Torrents’ business in
Germany has been under pressure and sales from the region were at Rs. 966 crore as compared to Rs. 1,038
crore in FY2021, which is a decline of 7%. Performance was impacted by muted market growth and increased
competitive pressures in the tender segment, in which the company lost a few tenders and expects new tenders
to come in around 2HFY2023, post which likely pick up in momentum could be seen. Overall, the German
market is expected to post a CAGR of 4.5% to 7.5% over the medium term. Focus on tendering business (through
cost competitiveness), increased coverage of generic markets to 65% from 55% now over the medium term,
expansion of the OTC business, and expanding portfolio beyond the retail market into specialty channels and
hospitals would be key growth areas for Torrent in German markets. However, given that the new tendering
process would be commencing from 2HFY2023, a meaningful uptick could be expected post that.
Torrent has a sizeable presence in Brazil markets and is one of the largest Indian companies operating in
Brazil. Revenue from Brazil for FY2022 stood at Rs. 742 crore, up 17.8% y-o-y and the share of revenue inched
up to 9% for FY2022 from 8% in FY2021. Torrent is present in the branded generics as well as generics in
Brazil markets and the market is expected to grow in double digits by 10-12% p.a. (after double-digit growth in
FY2022 as well). In Brazil markets, Torrent plans to focus on growing the base business backed by portfolio
expansion across therapy areas, field force expansion, expanding the generics business, entry in new therapy
areas, and building large brands. Collectively, this bodes well from a growth perspective.

July 18, 2022 5

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Collectively, the above aspects point towards Torrent’s efforts to create a sustainable and profitable
growth across geographies backed by achieving market share gains and expansion in existing therapy
areas in core markets of India, US, Brazil, Germany as well as in new markets. Based on the above, Torrent
aims to drive growth in geographies, driven by market share gains, improved launches/product fillings,
and productivity improvement measures.

Focus on new markets to develop them as future growth engines: In addition to the existing core markets,
the company is focusing on/investing in newer growth markets. These would either be done by expanding the
company’s presence in existing markets or by tapping in new markets. Torrent looks to leverage its existing
product pipeline to scale up and strengthen its presence in other existing growth markets, venture into new
markets by pivoting already-proven business model, and go-to-market strategies from existing markets.
Management also plans to incrementally invest in other existing as well as new markets to develop them as
growth engines over the medium to long term. In addition, new product launches and collaborations would
enable the company to achieve its goals. Overall, these measures would enable the company to develop
these markets as growth engines of the future, though these seem to be a medium to long-term strategies.

Efforts to improve quality, productivity, and cost competitiveness to drive operating performance:
As part of the strategic initiative to improve cost competitiveness and drive operational excellence through
focus on quality and productivity improvement, the company is focusing on the following parameters:
Š Drive productivity enhancements and cost competitiveness across procurement and manufacturing
operations
Š Ensure supply continuity through alternate sourcing and manufacturing strategies
Š Strong quality systems and process, connected technologies, reduced manual interventions, and strict
adherence to regulatory standards to enable enhanced quality standards
Š Optimise R&D efficiency by building a market-centric portfolio that targets unmet medical needs

The above parameters would enable the company to keep a tab on product/customer complaints, monitor
quality matrix, and per unit cost. Collectively, these factors would drive operational excellence, which in turn
bodes well.

Digital technologies to drive business model improvement: Technology is one of the key aspects of the
company’s strategy for sustainable and profitable growth going ahead. The technology stack hovers around
the areas of Information Security, Enterprise Architecture, and Compliance, which provides a conducive
environment for sustainability and transformation to achieve the strategic objectives of enhanced business
performance, improved productivity, higher quality, optimised costs, and superior customer experience.
Torrent’s key focus areas for the same include – 1. Leverage emerging technologies to gain competitive
advantage across various business verticals; 2. Invest in technology to create a robust, scalable, and open
framework to support transformation and accelerated adoption of emerging technologies; and 3. Execution
of technology projects under the governance framework of information security, infrastructure management,
and compliances. Recognising the dynamic impact of emerging technologies and its benefits, Torrent has
initiated a project for designing a new IT roadmap, which would address the demands of sustainability, growth,
and transformation, keeping in mind the needs for an enhanced information system programme, additional
controls, and automation, and changing compliance and regulatory needs. A new greenfield-enhanced ERP
implementation has also been initiated, with clearly defined business benefits.

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Financials in charts

Sales Trends (Rs Cr) Operating Profit - PAT Trends

12000 3500 3328
10402
3000 2862
10000 9383
8508 2485 2431
7781 8005 2500
8000 7461 2012
2000 1772 1842
1557
6000 1500 1252 1262
1026
4000 1000 792

500
2000
0

FY2023E

FY2024E
0

FY2019

FY2020

FY2021

FY2022
FY2023E

FY2024E
FY2019

FY2020

FY2021

FY2022

Operating Profit (Rs Cr) PAT (Rs Cr)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Margin Trends Improving Leverage (D:E)

35.0 1.40
32.0 1.33
31.0 30.5 1.27
30.0 1.20
28.6
25.0 25.9
23.8 1.00
20.0 0.87
0.80
16.6 17.7
15.0 15.6 14.8 0.67
13.2 0.60
10.0 10.6 0.47
0.40 0.40
5.0
0.20
0.0
0.00
FY2023E

FY2024E
FY2019

FY2020

FY2021

FY2022

FY2023E

FY2024E
FY2019

FY2020

FY2021

FY2022

OPM(%) PATM(%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoCE Trend (%) RoE Trends (%)

30.0 30.0

26.1
25.0 25.0
23.9 24.2
23.1 23.1
21.1 21.1
20.0 20.0
18.4
16.9 16.6
15.0 14.7 15.0
12.5
10.0 10.0

5.0 5.0

0.0 0.0
FY2023E

FY2024E
FY2019

FY2020

FY2021

FY2022

FY2023E

FY2024E
FY2019

FY2020

FY2021

FY2022

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

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Outlook and Valuation

n Sector View – Growth momentum to improve
Indian pharmaceutical companies are better placed to harness opportunities and report healthy growth going ahead.
Indian companies are among the most competitive ones globally and hold a sizeable market share in most developed
as well as other markets. Moreover, other factors such as easing of pricing pressures (especially in the US generics
market), rise in product approvals, and plant resolutions by the USFDA coupled with strong growth prospects in domestic
markets and emerging opportunities in the API space would be key growth drivers. This would be complemented by
strong capabilities developed by Indian companies (leading to a shift towards complex molecules and biosimilars) and
commissioning of expanded capacities by select players over the medium term. Collectively, this indicates a strong
growth potential going ahead for pharma companies.
n Company Outlook – India business to stage strong growth; US to improve gradually
Torrent is a leading pharmaceutical company present in emerging as well as developed markets. The company has
a higher exposure to chronic therapies. Moreover, the company derives a substantial portion of its sales from India,
followed by the US, Germany, and Brazil, which collectively form the core markets. The company has been outperforming
in the Indian as well as Brazilian markets and management expects to sustain traction going ahead as well and sees
these geographies as key growth drivers. Moreover, the German business is expected to gain traction and stage strong
growth ahead, backed by growth in the base business and new product launches. The company’s US business has
been under pressure as two of its plants, which cater to US markets – Dahej and Indrad – are under the USFDA’s
scanner with OAI/WL classification. However, the Levittown plant has commenced operations and the company expects
to launch a new product in the US market from the plant, which could help it mitigate pricing pressures. A timely and
successful resolution of these USFDA observations at its two plants is critical and could result in earnings upgrades
upon resolution.
n Valuation – Focus on creating a sustainable and profitable growth; Re-iterate Buy
Torrent in its annual report has highlighted a strategy to create sustainable and profitable growth across geographies
and therapy areas, which could support the company’s growth over the medium to long term. Torrent sees a healthy
outlook for India business, backed by expanding reach, market share gains, and likely traction in new trade generics
division. Expected healthy growth in the existing portfolio, likely outperformance to the industry, and new product
launches would drive Brazilian sales growth, while elevated cost pressures, price erosion, and delays in re-inspection
for plants by USFDA could slow down US growth momentum. At the CMP, the stock trades at 32.9x/27.8x its FY2023E/
FY2024E PE, respectively. Further, the stock price has corrected ~9% from its 52-week high and due to positive outlook
for India and Brazil businesses, we re-iterate our Buy recommendation on the stock with an unchanged PT of Rs. 1,770.

One-year forward P/E (x) band

45

40

35

30

25
P/E (x)

20

15

10

0
Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22
Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

Source: Company, Sharekhan Research

Peer valuation
CMP O/S P/E (x) EV/EBITDA (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY22 FY23E FY24E FY22 FY23E FY24E FY22 FY23E FY24E
Share) (Cr)
Torrent Pharma 1506 16.99 50959 40.6 32.9 27.8 22.6 19.2 16.1 21.1 23.9 24.2
Lupin 645 45.3 29,325 - 23.5 17.3 - 9.9 7.3 - 9.5 11.7
Cipla 967 81 77,991 28 25 20 17 15 12 15 14 15
Source: Company, Sharekhan estimates

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About company
Torrent, the flagship company of Torrent Group, was incorporated in 1972. Torrent has a strong international
presence across 40 countries, with operations in regulated and emerging markets such as US, Europe,
Brazil, and Rest of the World. The company operates through its wholly owned subsidiaries spread across 12
nations with major setups in Brazil, Germany, and US. The company is also one of the leading pharmaceutical
companies present in India as a dominant player in the therapeutic areas of cardiovascular (CV) and central
nervous system (CNS). The company also has a significant presence in gastro-intestinal, diabetology, anti-
infective, and pain management segments.

Investment theme
Torrent has been outperforming in the Indian as well as Brazilian markets and management expects to sustain
the traction going ahead as well. Moreover, the German business is expected to gain traction and stage
strong growth ahead, backed by growth in the base business and new product launches. Performance in
Europe is also getting on the improvement path and a meaningful revival is likely in FY2022 and ahead. The
US business is under pressure as two of its plants – Indrad and Dahej – are under USFDA scrutiny, However
the operations at Levit town plant have commenced and, hence, the company is planning for a few product
launches from the same. With these triggers in place, the quarterly run rate for the US business is likely to
bottom out and stage a gradual improvement. Further, a timely and successful resolution of these USFDA
observations at its two plants is critical and upon resolution could result in earnings upgrades.

Key Risks
Š Slowdown in ANDA approvals and USFDA-related regulatory risks could hurt business prospects.
Š Delay in product launches in Brazil, Germany, and US could restrict growth in these key geographies.
Š Currency fluctuation poses a risk to export businesses.

Additional Data
Key management personnel
Mr. Sudhir Mehta Chairman (Emeritus)
Mr. Samir Mehta Executive Chairman
Mr. Sudhir Menon CFO
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Mirae Asset Global investment Company 2.14
2 UTI Asset Management Co Ltd 1.37
3 FMR LLC 1.31
4 Blackrock Inc 0.88
5 Vangaurd Group Inc 0.87
6 Pictet Funds SA 0.76
7 T Rowe Price Group Inc 0.72
8 Kotak Mahindra Asset Management Co 0.62
9 Norges Bank 0.5
10 ICICI Prudential Life Insurance Co 0.48
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

July 18, 2022 9

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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