| Summary of Contents Torrent Pharmaceuticals
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs260
Current market price: Rs185 At an inflexion point Key points - Strong domestic formulation business: Torrent Pharmaceuticals (Torrent) is a well-known name in the branded formulation market in India, with a strong focus on the fast growing chronic lifestyle segments. We believe Torrent's domestic formulation business will continue to grow at above-average industry rate of 17.5% CAGR over FY2007-09 on the back of aggressive new products and increased geographical penetration.
- Investment phase in Brazil and Russia is over: Torrent's operations in Brazil and Russia turned around in FY2007. The company is expanding into newer markets in these regions. With the investment phase now over, these businesses should start contributing to Torrent's profitability from FY2008 onwards.
- Heumann to break even in FY2009: Torrent's Heumann acquisition has been incurring huge losses due to the stringent regulatory scenario in Germany. Going forward, Torrent plans to turn around Heumann through a strong top line growth by introducing new products. Further, Torrent plans to shift 60% of its production to India by FY2009, which will result in a margin improvement of 6-8%. We expect the Heumann business to grow at a CAGR of 6% with a strong margin expansion over FY2007-09.
- US foray in FY2009: Torrent has filed seven ANDAs and five DMFs in the USA. It expects to make additional 14 ANDA and nine DMF filings in FY2008. Even though the company is confident of starting its US business in early FY2009, we have not factored in any upside as the marketing arrangements for the products have not yet been finalised.
- Compelling valuations; upside of 40%: We expect Torrent's earnings to grow at a 29.7% CAGR to Rs157.4 crore in FY2009 on the back of a 14.8% growth in revenues and a 270-basis-point expansion in the margin. At the current market price of Rs185, the stock is quoting at 13.0x its FY2008E earnings of Rs14.2 and 9.9x its FY2009E earnings of Rs18.6. We initiate coverage on Torrent with a one-year price target of Rs260.
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