Recommendation: Buy
CMP = Rs 185
Price target: Rs 260
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. I 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.
· 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, I have not factored in any upside as the marketing arrangements for the products have not yet been finalised.
· Compelling valuations; upside of 40%: I expect Torrent's earnings to grow at a 29.7% CAGR to Rs 157.4 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 Rs 185, the stock is quoting at 13.0x its FY2008E earnings of Rs 14.2 and 9.9x its FY2009E earnings of Rs 18.6.
· I recommend Buy option for Torrent with a one-year price target of Rs 260.
