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TORRENT PHARMA October 2012

BUY Target: Rs.760-775

Company Profile:
Torrent Pharmaceuticals (TPL) is Flagship Company of the Torrent group. It is a leader in cardiovascular and central nervous system
segments. It also has presence in gastro-intestinal, diabetology, anti-infective and pain management segments. Its manufacturing
facilities are located at Indrad (Gujarat) and Baddi (Himachal Pradesh). In India the company has 11 sales and marketing divisions. It
has 1000 product registrations across 50 countries that include US Latin America, Russia, Europe, Japan and many more. The
company has subsidiaries namely Zao Torrent Pharma (Russia), Torrent Do Brasil Ltda (Brazil), Torrent Pharma GmbH (Germany),
Torrent Pharma Inc. (USA) and Torrent Pharma Philippines Inc. (Philippines).

Investment Rationale:
Positives:

• Torrent is one of the leading players in India Pharmaceuticals Industry maintaining leadership position in some of the key chronic
therapies of Cardiovascular and Neuro-Psychiatry. The Company is ranked No.2 in Cardiovascular segment and No 4 in Neuro
Psychiatry therapies

• The Company`s revenues are mainly from manufacture and sale of branded as well as unbranded generic pharmaceutical products

• The company has witnessed 5 year revenue CAGR of over 20% in the revenues from International operations

• Focus on enhancing manufacturing capabilities, explore new avenue for collaboration in R&D, aggressive brand building and
market expansion.

• TPL's research and development department has a team of 560 scientists engaged in drug discovery, drug development and new
drug delivery systems.

Negatives:

• High rate of failure and long gestation period of a discovery project coupled with significant upfront costs to be incurred

• The domestic market is subject to price control under DPCO, 1995.

Sector Snapshot:
India is one of the fastest growing pharma markets in the world as just in three decades it has grown more than seven times and
presently ranks 14th in the world in terms of value and 3rd largest in terms of volume of production, accounting over 8% of global
pharmaceutical production. As on whole, the Indian pharmaceutical industry is estimated as Rs 1 lakh crore industry, of which about Rs
48,200 crore is from the domestic market. The industry is growing at the rate of over 10 percent for the past one decade.
Indian export of pharmaceuticals have shown a good recovery in the last year mainly on the back of improvement in economic condition
of the developed world, while the increased focus of pharma majors on the US market, increase in the number of drug registrations and
strong demand for Indian drugs in Africa were other key drivers. India is expected to double pharmaceutical exports in the next two
years, with the Pharmaceutical Export Promotion Council (Pharmexcil) eyeing overseas sales worth Rs 1,22,500 crore ($25 billion) by
the end of 2013-14. At present, the US is India`s largest market for pharmaceutical export with a 22% share, followed by the UK 4%
and Germany 3.5%.
The Indian pharmaceutical sector has been in eye of storm after seven acquisitions took place in five years. Local drug-makers sold out
all or part of their operations to foreign companies, biggest of them all -was Ranbaxy`s promoters selling their entire stake to Japanese
drug-maker Daiichi Sankyo. In October last, at a high level meeting convened by the Prime Minister, it was decided that India will
continue to allow foreign direct investment in drugs and pharmaceuticals sector through automatic route for greenfield projects and in
case of brownfield investments, FDI will be allowed through the Foreign Investment Promotion Board (FIPB) for six months. These
acquisitions will, however, be routed through the Competition Commission of India for the six months period
The government is examining a draft policy floated by the Department of Pharmaceuticals, proposing a pricing model that leaves scope
for fixing the rate to the industry, subject to a maximum ceiling. The draft which has been in the public domain since last year is being
opposed by the NGOs and the Health Ministry as they argue that the pricing would largely be market based even though there is a
ceiling and would lead to increase in prices of the essential drugs.
Though, the Indian companies have realized late but they too are going in a big way scaling up their R&D spending. There is urgent
need of increased spending on research to create new molecules and catch up with China and Japans aggressive patent filing approach.
As value creation is going to be the next step for the development for the Indian pharmaceutical sector, for which Intellectual Property
becomes indispensable. Over the next few years, it is expected that the patent laws will provide impetus to the launch of patent-protected
products. Such products have the potential to capture up to 10 per cent share of the market by 2015. With the dawn of the product patent
era in India, focus now has shifted to `Research & Development` for the pharmaceutical companies to survive in the global market

Conclusion
The Indian Pharmaceutical Industry ranks very high amongst all third world countries, in terms of technology, quality and the vast range
of medicines that are manufactured. Although the industry has been growing at a fast pace barring the time of the global recession, it
still is likely to maintain a strong growth momentum spurred by patent expiries of blockbuster drugs, emerging licensing deals and
increasing generic penetration in regulated markets, over the next two-three years. Besides markets like US and Europe, Japan, the
world`s third-largest market in value is also expected to drive growth for domestic generics. Also, the shortage of sterile products in
regulated markets, will provide an opportunity for sterile injectable manufacturers - and an NCE pipeline as companies focus on
innovative R&D.

Financial Analysis Valuation

(In Rs. Cr) FY12 FY13E FY14E FY12 FY13E FY14E

EPS (In Rs.) 33.83 36.20 39.82
Net Sales 2695.90 3197.85 3793.26
BV/Share (In Rs.) 141.09 169.80 202.13
PAT 286.30 306.34 336.98
P/E 19.50 18.22 16.57
OPM% 20.22 18.93 17.71
P/BV 4.67 3.88 3.26
NPM% 10.62 9.58 8.88
RONW% 23.98 21.32 19.70

Based on the good annual result for FY12 which reported a top-line increase of 22.66% yoy at Rs.2695.90 Cr Vs. Rs.2197.80 Cr.
along with holding up the margins, and PAT growth of 5.96% at Rs.286.3 Cr. as compared to Rs.270.12 Cr. in FY12, the EPS
works out to be Rs.33.83 for FY12 and Rs.36.20 for FY13 (Expected). At Current market price of Rs.660 the stock is trading at
attractive valuations (P/E) of 18.22x for FY13(E) EPS and 16.57x for FY14 (E) EPS, consider buying the stock near Rs.675-660
for medium term target of Rs.760-775 on account of robust results

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