India growth crucial for Torrent Pharma's health amid steep fall in volume

The Torrent Pharma stock had corrected 21 per cent from its February highs, before recovering lost ground, over the last couple of weeks. Among key concerns for the Street has been its domestic volume growth over the past year, regulatory worries, and valuations.

After its January numbers, analysts at Emkay Global pointed out the declining volume trend. “Torrent Pharma has now seen the fifth consecutive month of volume decline (9 per cent in January 2020). Though the company has managed to take price hikes, we believe this is not sustainable in the long term.”

Praful Bora and Rajat Srivastava of the brokerage believe the company’s top brands — Shelcal and Losar H — continue to witness steep volume decline.

However, the company — which gets a majority of its revenues from chronic therapies — posted 17 per cent growth in February, thus outperforming the pharma market’s 12 per cent growth.

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This was largely driven by higher prices, up by 8-9 per cent. It will be interesting to see if the company is able to sustain domestic growth, given it is the biggest market, accounting for about 44 per cent of revenues.

A key concern for the Street is the resolution of regulatory issues at the Dahej and Indrad facilities, which will enable it to launch its high-value products in the US.

Analysts believe that the US business (about a fifth of sales) could decline with the US FDA’s Warning Letter on Indrad/Levittown facilities, as well as official action initiated against the Dahej Plant. While a re-inspection for Dahej has been scheduled for mid-CY20 and for Indrad by end-CY20, any adverse outcome from these would be negative for the company.

Valuations, too, are in the expensive zone. At its current price, the stock is trading at 33x its one-year forward earnings estimates, as compared to its five-year average of 23x.

Analysts at Motilal Oswal Financial Services believe the firm’s premium valuations are linked largely to its domestic business, where pricing-led growth is unlikely to sustain.

Further, with most of the margin gains on account of the Unichem acquisition having been factored in, there might not be more gains hereon.

Torrent Pharma says promoters haven't pledged equity, NSE action not needed

Torrent Pharma has said that its promoters have not pledged any equity shares they hold in the company for any purpose, and a surveillance action by stock exchanges was not warranted.

The promoters are obligated to hold a minimum 26 per cent shares and management control of Torrent Pharma during the period of loans the company has taken, it said.

The company was commenting on reports of the National Stock Exchange shortlisting five companies, including Torrent Pharmaceuticals, with higher levels of pledged shares by promoters for surveillance action.

"The promoters of Torrent Pharma have not pledged any equity shares they hold in TorrentPharma for any purpose," the company said in an emailed response to PTI.

Promoters, it said, "are obligated by virtue of certain covenants/negative covenants agreed by Torrent Pharma in the loan agreements executed with various lenders that the promoters shall continue to hold management control (inter-alia holding at least 26 per cent of the equity share capital of Torrent Pharma or otherwise) during the period such loans are outstanding. Further, such obligation is created in respect of loans raised by Torrent Pharma for the purposes of its business."

Torrent said a pledge of shares is a security interest in favour of lenders and can be enforced by sale of such shares in event of default.

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On the other hand the covenants/negative covenants agreed under various loan agreements obligate the promoters not to sell a specified portion of their shares so long as loan given to the company is outstanding.

"It may be noted that recently SEBI expanded the disclosure requirements (effective from 01-Oct-19) in respect of promoters shares which are subject to any kind of encumbrance by specifically including the requirement to disclose covenant/negative covenants/non disclosure undertaking given in respect of promoters holding in a listed company. In this context the foregoing disclosure was made by promoter of Torrent Pharma," it said.

This, it said, was made abundantly clear in the disclosures filed with the stock exchange at various point in time.

"Considering there are no pledge on the promoters' holding in Torrent Pharmaceuticals Ltd, we believe surveillance action is not warranted," the firm said, asking NSE to revisit and remove the surveillance action on the stock.

The National Stock Exchange had last week stated that it has shortlisted five companies, including Torrent Pharmaceuticals, with higher levels of pledged shares by promoters for surveillance action.

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The exchange will levy a minimum margin of 35 per cent on the respective shares, including on stocks in the derivatives segment.

Max India, DCM Shriram and Jindal Stainless are among the other companies identified for surveillance action, according to a circular dated April 1.

Derivatives strategy on Torrent Pharmaceuticals by HDFC Securities

BUY TORRENT PHARMA FEB FUTURE @ Rs 2,090

Stop loss at Rs 2,040

Target of Rs 2,250

Rationale:

-- The stock price has registered new all time high with higher volumes

-- Higher tops and higher bottoms on the daily and weekly charts

-- Stock price is also placed above all important moving average parameters

-- Long build-up is seen in the Derivatives Segment

We recommend buying Torrent Pharma Feb Fut at the current market price, for the upside target of Rs 2,250, keeping stop-loss at 2,040.

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