Fundamental analysis of torrent drugs

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Basic Analysis of Torrent Drugs: Titan Co. Or investors look for stocks that will rise steadily over time, such as large tech stocks, that can provide consistent returns over many years. How about introducing you to a new stock: Torrent Pharma, a leading drugmaker that has consistently risen over time?

In this article, we do a fundamental analysis of Torrent Pharmaceuticals to find out how it has generated impressive returns for its shareholders.

Fundamental analysis of torrent drugs

In this article, we will do a basic analysis Torrent drugs. Let’s learn about the company’s history and business, followed by an industry overview. In the process, we will also learn about the business segments and its product line.

Later, some sections are devoted to revenue, return ratio and debt analysis. A summary of the R&D expenditures of the pharma company concludes the article.

Company overview

Torrent Pharmaceuticals is the parent company of the gas-to-power conglomerate Torrent Group. It was incorporated 63 years ago in 1959 as Trinity Laboratory. Over the years, the company has grown organically and organically to become a leading pharmaceutical manufacturer worldwide.

Torrent Pharma is a leader in several therapeutic areas: Cardiovascular (CV), Central Nervous System (CNS), Gastrointestinal (GI) and Women’s Health (WHC).

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It has 7 production facilities with a production capacity of 90 MT API. These sites manufacture a wide range of products including oral solids, topical products, human insulin and synthetic APIs. Its production capacity as on March 31, 2022 is over 2,100 units of formulations. As of current date, it has an international footprint with a presence in more than 40 countries.

Torrent Pharmaceuticals has 13,900+ employees of which 790 are scientists. It spent Rs 516 crore on research and development in FY22. The pharmaceutical company has filed 13 patents and developed more than 120 projects.

We mentioned above that the company has an international presence. In the next two sections, we discuss its geographic presence and product line as part of our fundamental analysis of Torrent Pharmaceuticals.

Business segments and product line

Doing a quick segment analysis, we find that India accounted for 55% of Torrent Pharma’s revenue in the latest fiscal year. Additionally, 96.68% of non-current assets are held outside the country. Thus, although the company sells globally, its manufacturing base is in India.

The table below highlights the geography-wise revenue share and non-current asset distribution for FY 2021-22.

Geology Revenue (%) Non-Current Assets (%)
India 55.05% 96.68%
America 12.54% 0.93%
Germany 11.36% 1.17%
Brazil 8.72% 0.34%
In other countries 12.33% 0.88%

In the Indian Pharmaceutical Market (IPM), 53% of the company’s revenue comes from chronic/sub-chronic drugs. This category accounts for 74% of Torrent Pharma’s total revenue. This provides strong visibility and stability to the drugmaker’s sales.

The figure below shows IPM and the company’s product line worldwide.

Fundamental Analysis of Torrent Drugs – Business Segments
Source: Torrent Pharmaceuticals Ltd. Annual Report FY22

Career overview

So far we have studied the business as part of our fundamental analysis of Torrent Pharmaceuticals. In this section, we learn about the pharmaceutical industry and its opportunities.

The organized pharmaceutical market is expected to grow in the range of 3-6% annually from $1.54 trillion in 2022 to $1.81 trillion in 2026. The growth was partially offset by $188 billion in exclusive losses in brand losses. .

Exclusivity losses arise when pharmaceutical companies have to abandon their patented products. They put it on the market when the patent expires, 10-15 years after milking the profits from the patent (the legal right to develop, sell and market the drug).

The graph below shows global pharmaceutical spending from 2020 to 2026 (projected).

Fundamental Analysis of Torrent Drugs - Company
Source: Torrent Pharmaceuticals Ltd. Annual report

Overall, industry growth is expected to be subdued. In developed economies, new treatment adoption is the primary demand driver. As demand from developing countries slows down, the transition to a pre-Covid low-growth era is taking place. Despite this, developing countries will still have the largest absolute growth.

Going forward, longer life expectancy, changing lifestyles, improving purchasing power, health insurance and infrastructure penetration and digital analytics will be key growth drivers for the pharmaceutical industry.

The figure below highlights drug costs in countries where Torrent Pharmaceuticals has a presence.

Fundamental Analysis of Torrent Drugs - Company
Source: Torrent Pharmaceuticals Ltd. Annual report

We can observe that medical costs in Brazil and India will rise faster than in the United States and Germany. As Torrent earns more than half of its revenue from the country, this bodes well for the stock.

Revenue and Net Profit Growth

Torrent Pharmaceuticals’ operating revenue grew at a CAGR of 7.23% from Rs 6,002 crore in FY18 to Rs 8,508 crore in FY22. During the same period, its net profit grew unevenly.

The company has also recognized a compensation of Rs 439 crore in FY22 for discontinuing its liquid facility operations in the US. High competition and incremental investments required to bring products to market do not justify long-term business prospects.

Additionally, the pharmaceutical company had higher deferred tax due to its transition to new tax regime during the current financial year. These two tax items together reduced overall net profit to Rs 777 crore in FY22.

Similarly, in FY19, intangibles and product recall costs were Rs. Found 357. Torrent’s products had to be recalled because they had carcinogenic properties.

The table below shows the operating revenue and net profit figures for the last five financial years.

Financial year Operating Revenue (Rs. Crore) Net Profit (Rs. Crore)
2022 8,508 777
2021 8,005 1,252
2020 7,939 1,025
2019 7,673 436
2018 6,002 678

Margins: Operating profit and net profit

Taking our fundamental analysis of Torrent Pharmaceuticals forward, we note that the net profit margin was significantly lower in FY22 and FY19. This was for the same reasons highlighted in the revenue and profitability analysis section above.

Overall, the operating margin has improved over the previous five financial years. Excluding the change in taxation and impairment loss as a one-time event, the management is responsible for delivering a higher net profit margin in the coming year.

Financial year OPM (%) NPM (%)
2022 31 14
2021 32 16
2020 29 13
2019 26 6
2018 28 11

In the next section, we look at Torrent Pharma’s two earnings ratios: Return on Capital Employed (RoCE) and Return on Equity (RoE).

Revenue Ratios: RoCE & RoE

From the figures below, we can see that both RoCE and RoE/RoNW were affected significantly in FY19. Since then, there has been a rapid recovery in business. The return on equity declined again in the previous financial year due to the reasons mentioned above.

Financial year RoE or RoNW (%) RoCE (%)
2022 18 21
2021 21 19
2020 21 17
2019 9 14
2018 15 13

Torrent Pharmaceuticals offers high rates of return. This is a plus point for investors as it helps counter the slow earnings growth.

Loan/Equity & Interest Coverage

Speaking of leverage ratios for pharma stocks, Torrent has reduced its leverage over time. For the fiscal year ended March 31, 2022, its debt-equity ratio was 0.52 and interest coverage ratio was 9.03 times.

The table below shows Torrent Pharmacy’s debt/equity ratio and interest coverage ratio for the past five years.

Financial year Debt/Equity Interest coverage
2022 0.52 9.03
2021 0.71 6.21
2020 0.98 4.73
2019 1.08 3.51
2018 1.05 4.05

Research and development costs

Studying research and development expenditure is an important step in performing a fundamental analysis of Torrent Pharmaceuticals. The figures given below are taken from the annual reports of the company for the last financial years.

Management allocated more funds for research and development in the latest fiscal year. This translates into growth opportunities for the company in the long run.

Financial year R&D expenditure Turnover %
2022 430 6.45
2021 371 5.86
2020 381 6.32
2019 398 7.16
2018 369 8.92

Apart from this, the drug maker is making good progress in its efforts to strategically diversify into different dosage forms. It is setting up a greenfield manufacturing facility for oral oncology products in Bileshwarpura, Gujarat. Management hopes to file multiple complex generic oncology products in advanced markets such as the US, Europe and Brazil in the near future.

We are now at the end of our fundamental analysis of Torrent Pharmaceuticals. Let’s take a quick look at the stock’s key metrics.

CMP ₹1,635 Market Cap (Cr.) ₹55,500
EPS ₹23.60 Stock P/E 46.20
RoCE 21% RoE 18.0%
face value ₹5.0 The book is worth it ₹180.00
Promoter Holding 71.2% Cost of book value 9.11
Debt to Equity 0.52 Dividend yield 0.25%
Net profit margin 14% Operating profit margin 31%

At the end

From our fundamental analysis of Torrent Pharmaceuticals, we can say that it has been a rough ride for the company. However, for its investors, the pharma stock has given compound results of 20.55% every year for the past five years. Going forward, a steady increase in the company’s operating revenue and net profit is expected.

In your opinion, can Torrent Pharma avoid exceptional losses in the future? Its bottom line is that no more wins are important. What do you think about the stock? Let us know how in the comments below?

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Vikalp Mishra is a Commerce graduate from Delhi University. He likes to write about finance, money and business. He is a voracious reader with a genuine interest in investing. Email him at [email protected].

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