Bengaluru/New Delhi : The two pharmaceutical companies announced their December quarter results (Q3FY22) on Tuesday evening and immediate investor reaction for both has been quite contrasting. On Thursday, when markets reopened after closing for Republic Day, investors punished Torrent Pharmaceuticals Ltd’s Q3 performance, dragging its shares down as much as 15% on the NSE. On the other hand, Cipla Ltd shares rose nearly 2% on the day when the benchmark Nifty 50 index fell 1%.
Cipla’s third-quarter earnings are more or less in line with analysts’ estimates, but Torrent Pharma’s earnings have fallen short of market expectations by a wide margin. Ebitda (earnings before interest, taxes, depreciation and amortization) declined 11.4% year-on-year (y-o-y). 538 crores. Ebitda has fallen 20% below estimates by Kotak Institutional Equities due to increased US erosion, supply failure, higher freight costs and under-recoveries. Note that Torrent Pharma’s US business has been underperforming as revenue from the region declined 20% year-over-year. This was impacted by a sharp drop in prices in the base business and absence of new launches.
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Overall, the company’s EBITDA margin fell to 25.5% in the third quarter, the lowest in seven quarters. This measure is up 540 basis points (bps) and 490 bps, respectively, compared to the year-ago period. One basis point is 0.01%. A 210 bps year-over-year decline in gross margin (influenced by price increases in the US) and a relatively faster rate of increase in other expenses hurt operating margins.
It is worth noting that while the US market has lagged, Torrent Pharma’s domestic business performed well in Q3, with revenues growing 15%, which outpaced the growth of IPM (Indian pharma market) by a large margin . Strong demand for Torrent Pharma’s top brands in Focus Therapy aided its domestic growth. RoW (rest of the world) saw better growth, with overall revenue growing 6% to . Done 2,108 crores. But weak margins meant a 16% drop in net profit. 249 crores.
Clearly, some analysts have cut their earnings estimates for fiscal 2012 and fiscal 2013 because of the sluggish third-quarter earnings. Less-than-expected recovery in business in Germany is risky in the coming days. In Q3, revenue from Germany declined 10% annually.
Additionally, regulatory issues loom. Purvi Shah, a pharma analyst at Kotak Securities PCG desk, said, “The two plants at Dahej and Indrad are yet to get US Food and Drug Administration (FDA) approval and this is a big loss for the stock. As a result, Torrent Pharma has not received approval to launch new products in the US, which in turn leads to pricing pressure for older products as competition increases.” Shah further added, “For investors, the USFDA The approval of two plants and new products will be key factors to watch for the company to stay away from such concerns.”
It helps that Torrent Pharma expects to be back on track with respect to margins in the coming quarters with the help of cost optimization measures. Nevertheless, the outlook on profitability for FY22 as a whole remains weak. As analysts at Motilal Oswal Financial Services Ltd said, “After two years of strong year-on-year earnings growth, Torrent Pharma may exhibit a decline in year-on-year earnings in FY22.”
To be sure, after the sharp price correction, the stock is back to roughly where it was a year ago. However, some analysts say a sharp drop in Torrent Pharma’s share price could be offset by the post-quarter Q3 results.
Nevertheless, the above factors may limit significant upside from a near-to-medium term perspective.
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