*A torrent of brands in EMs Torrent’s focus on building brands in the domestic/emerging markets (EM) provides sustainability to its business. FY14-17E revenue CAGR of 18% would be driven by investments in EMs, integration of Elder’s brands and broad-basing US presence. Larger scale alongside no material capital needs should stabilise base RoCEs (18-20%) and provide balance sheet capacity to invest in innovation; presently investment in innovation is limited but it isn’t a concern at this stage. We see limited scope of earnings multiple rerating (16.4X FY16 eps of `51) and don’t expect shocks given its strong branded base; positive surprises to our FY14-17E EPS CAGR of 29% (ex-Cymbalta) may emerge from Elder or large opportunities/scaling up the value chain in US business. Continuing low growth in Brazil and USFDA cGMP issues are key risks. *
Competitive position: MODERATE Changes to this position: STABLE *Above average rank on 5’R’ and DNA indicates high sustainability * Torrent ranks high on rational capital allocation and management quality. Whilst its investments in Brazil, India, US and other Asian markets have paid off in the past, the more recent investments in Elder’s brands, Europe and Mexico/Russia are yet to bear fruit. High score on our DNA framework provides confidence on Torrent’s capability of scaling up its branded businesses (66% of FY16E sales). Torrent has built quality brands and enjoys a diversified portfolio in India. *Revival of growth in Brazil and Elder acquisition key growth drivers * Improvement in execution led by change in management in the India business (34% of FY16E sales) is likely to sustain. Moreover, revival of growth in the Brazil business (12% of FY16E sales) led by new approvals (branded + unbranded) is a key catalyst. We believe that the Elder acquisition would be RoCE-dilutive in the near term, but we do not rule out revenue synergies from cross-selling vitamins in CVS/CNS. A step up the value chain in the US (33% CAGR in US base sales over FY14-17E, 17% of FY16E sales) through inorganic measures appears likely. *Base EBITDA margins to expand from 20.5% in FY14 to 25% in FY17E * Key drivers for margin expansion are: (a) Cost synergies through Elder brands (EBITDA of 50% in FY16E); (b) US sales ramp-up, (US EBITDA margins, which are in line with consolidated margins in FY14, to be materially higher in FY17E); (c) Operating leverage in legacy India business (through improvement in efficiency of M` and overheads). Torrent’s base business 20% RoCE for FY14 is lower than peers due to investments made in EMs which would be monetized in near term. *Strong earnings growth momentum to sustain valuations * We estimate base earnings FY14-17E CAGR of 29%. Whilst strong earnings growth would sustain current valuations, key triggers for a re-rating are realisation of revenue synergies from Elder, scale up of the value chain in the US, and sales ramp-up in RoW / Brazil. Our TP implies 18.3x one-year forward P/E vs the current 17.4x. Key risks: failure in reviving Brazil business growth and USFDA cGMP issues. Torrent trades at a deserved 25% discount to large cap average FY16E PE of 22.4x given average competitive positioning and lower RoCE. -- -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no guarantee for the genuineness of the same."ANY member of this forum doesnt prepare or publish any research report; or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or iv. give price target; --- You received this message because you are subscribed to the Google Groups "Niftyviews.com" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/d/optout.
