JM Financial has given a sell rating to Torrent Pharmaceuticals with a target price of Rs 1,980 over 12 months.Torrent Pharma has outperformed peers in terms of earnings and stock price performance over the last 2 years.
Torrents strong domestic performance has come on the back of successful integration of Unichem brands and significant price hikes in key brands.
Given that Torrents large and mid-cap peers have now shifted focus to the domestic market in general and the high-growth chronic therapies in particular, significant risks are seen to the mid-teen growth that is currently being factored in for Torrent in FY21.
The brokerage says the US business is expected to remain under pressure in the near term given the regulatory challenges at the Dahej and Indrad facilities with a resolution unlikely until December 2021.
Depreciation of the Brazilian Real and batch traceability regulations will remain major headwinds in Torrents other key markets of Brazil and Germany.
The share price of the company moved down by -1.74 per cent from its previous close of Rs 2550.35.
The last traded price is Rs 2505.90.
Incorporated in 1972, Torrent has a market cap of Rs 43240.64 crore.Investment RationaleWith the impact of discontinuation of low margin tail brands and the synergy benefits of Unichem integration fully realized, Torrent is approaching peak margins with limited room for further expansion.
Accounting for the impact of Covid-19, at 39 times revised FY21E EPS - 30 times revised FY22E EPS, Torrent is trading at a premium of c.70 per cent and c.55 per cent to its 5-year average trading ranges respectively.
The brokerage believes that the valuation premium is untenable with the risks to near-term growth remaining underappreciated and therefore has downgraded Torrent to sell.
FinancialsFor the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1924.00 crore, down -2.24 per cent from last quarter sales of Rs 1968.00 crore and down -1.23 per cent from last year's same quarter sales of Rs 1948.00 crore.
The company reported net profit after tax of Rs 251.00 crore in the latest quarter.