Torrent Pharmaceuticals Limited (500420) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Torrent Pharma. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sudhir Menon, Chief Financial Officer and Executive Director, Finance. Thank you, and over to you, sir.

Thank you. Good evening to all of you, and welcome to the Second Quarter Earnings Call for FY '24. I'm pleased to share the details of our strong performance this quarter across all our focus markets. The branded business contributed to 73% of the overall revenue base this quarter and have grown by 18%. Germany with incremental tender wins over the last 3 quarters has helped in registering a constant currency, high single-digit growth. U.S., we continue to take measures to enhance the cost efficiency in the base business, while we await new product approvals to start flowing in the future quarters, and this should start adding positively to the overall performance of the company going forward. During the year, we have discontinued low-margin products in the U.S. and streamlined our back-end processes, optimized resources in order to enhance the operational effectiveness. Further, we've capitalized the oral oncology facility this quarter in July and have commercialized one product in the U.S. In terms of key financial performance highlights for quarter 2, revenues were INR 2,660 crores, up by 16%, compared to the previous year same quarter. Operating EBITDA for the quarter is INR 825 crores. Operating EBITDA margin stands at 31%, registering a growth of 22%. Leverage is now at 1.16x, and we expect by March '24, it should be below 1x. I would request Aman to present the performance of India business now.

Thanks, Sudhir. India business revenue for the quarter at INR 1,444 crores grew by 18%. Excluding the acquired business of Curatio, the base business growth was 12% for the quarter against the market growth of 4% as per the AIS data set. Our market outperformance was led by continued double-digit growth in chronic therapies, revival in gastro demand, traction in the consumer division and new launch performance. Our new launches in the chronic business continue to do well. Torrent is ranked #1 amongst the branded generic players in the Sitagliptin market, and we continue to gain market share. We expect to clock INR 100 crores sales on a MAT basis during the coming quarter for our Sitagliptin franchise, which would be our fastest INR 100 crore launch, mainly on account of field force expansion undertaken last year. The Curatio portfolio continues to deliver robust performance with 17% growth for the quarter, led by the flagship brand, Tedibar. Tedibar continue its growth trajectory upwards of 25% on account of increased activation at pediatricians and more recently, digital media and e-commerce platforms. On the acquisition integration front, we have completed 1 year since the acquisition of Curatio. EBITDA margins are now 14% higher than pre-acquisition levels, which is also 6% higher than the previous quarter due to enhanced focus on cost synergy execution. We believe there is still significant headroom for margin improvement over the next 6 to 8 quarters, mainly through operating leverage. The Consumer Health division is progressing well, and our flagship brand, Shelcal-500 continues to see increasing sales traction to media and trade activation. The national media campaign for Shelcal-500 was initiated towards the end of Q2 and other brands such as Unienzyme, Tedibar, Ahaglow are now all active on digital media and e-commerce engagement. At the end of the quarter, Torrent has 20 brands in the top 500 of the IPM, with 15 brands more than INR 100 crores sales as of max September 2023. We expect the India business to continue outperforming the market growth. Our focus during the rest of the year will be to continue improving our market share in our focused therapies, new launch performance and improving field force productivity of the expanded divisions and regions, while executing our Consumer Health national rollout. I'll now hand over to Mr. Sanjay Gupta for the International business.

Thank you, Aman. Let me start with the branded generics market of Brazil. In Q2, Brazil had a constant currency revenue of BRL 149 million as compared to BRL 121 million in Q2 of prior year, registering a 23% growth. Adjusted for Q1 cutover sales, Q2 growth would be at 13%. As per IQVIA of end of August, Torrent branded generic growth is 13% versus a branded generic market growth of 8%. IQVIA is showing that almost all of our products are growing much faster than the market. We have added 26 reps in CNS segment during August '23, and this will bring the total number of Torrent reps in Brazil to 206 in CNS. This will expand our reach and it helps us in balancing our portfolio amongst the 2 teams. We've been launching 4 more products before the end of this financial year, 2 in CNS and 2 in cardio diabetes. Our Generics business in Brazil continues to show strong momentum. Moving on to Germany. Our German business has registered a growth of 21% this quarter. Constant currency revenue was at EUR 30 million, up by 8%. During Q2, Torrent had good wins in tender, which will have a positive impact on sales starting in the Q4 timeframe. We also expect the impact of our sales force expansion from 8 to 16 to show in our OTC business by the end of this year. In H1, we have launched 5 products, 3 from partners and 2 in-house. Going forward, Torrent's focus will include cost optimization to improve the competitiveness in the tender segment, launching new progress products and developing its OTC business. In the U.S., we registered revenues of INR 248 crores, down by 15%. Constant currency revenue for the U.S. is at $30 million, down by 18%. Adjusted for one-off income in Q2 of the previous year, constant currency degrowth is at 16%. Degrowth was due to loss of low-margin business and some short-term supply issues. As Dahej facility has received the EIR and now we can launch new products from this facility. As Sudhir mentioned, we recently launched our first oncology product from a new oral onco facility at Bileshwarpura, as well as a niche Derma CGT product from our derma plant at Pithampur. Customer response has been positive for both these launches. To conclude, our focus will remain on deepening our presence in branded generic markets, while continuing to grow in Germany and returning to profitable growth in the U.S. Operator, we can open the call to questions now, please.

[Operator Instructions] The first question is from the line of Damayanti Kerai from HSBC.

Sir, my first question is on India business. So while you maintain your outperformance against the market, what we have seen is that the volume trends have been very muted. So what are your thoughts on that? Like how it will dictate the market growth ahead and your growth accordingly? And if you can also split your second quarter India growth into volume, price and new launches?

Yes. We think that while external data reflects market growth to be 4% in the case of AIOCDs and I believe, 7% in IQVIA. It's somewhere in the middle, maybe even on the higher range, if you take 7%. Our views at market growth is actually around 7% to 8% because otherwise, we would not be able to be at 12% kind of a growth. So our delta has generally been in that range. So maybe we'll give it a few months or quarters for the market reflection to normalize the various kind of adjustments and normalizations that have been happening. So I would wait another quarter or so to just see the market reflection. In terms of our growth breakup. So as mentioned, our reported growth is 18%, but the base business growth is 12%. So out of that 12%, roughly 7% is coming from price and rest is from volume in new products.

If you can specify volume contribution also, I guess that will give us some better insight?

So volume would be about 1%, 1.5%. New products is about 3.5% to 4%, but new products is practically counted as volume because it's from a 0 base. So we would count -- in the first year, new product stays pretty much and volume to be seen in the same basket. So combined, let's say, volume growth is about 4%.

Okay. Sir according to you, say, like there has been no -- like you mentioned market should see normalizing trends a few quarters from now. Sir according to you, do you think this volume -- muted volume trends which we're seeing that's not structural in nature, right? It's just maybe some temporary adjustment or some...

That's correct. That's what we believe.

Okay. And my second question is on Brazil. So it includes the spillover impact, right, as you mentioned in your opening commentary? Yes. So can you specify the total number of reps you mentioned for CNS, but if you can specify a total number in the market?

Yes. So I've mentioned the CNS -- you can add the cardio diabetes field force of 113 people to that.

So 206 for CNS and 113 for cardio segment.

Correct.

Okay. Yes. So very broadly, if you can also talk a bit about your expectations for the Brazil market outlook, like you have added sales force and then you have been picking up well on generics also, your core segment is doing well. So how should we see this segment?

Essentially, Brazil, our primary sales vary from quarter-to-quarter. So I would suggest that we look at a trend over 2 or 3 quarters to get a feel for how the business is performing. So let me give you figures from IQVIA for last fiscal year and then 2 quarters and you can get an idea. So for fiscal year ending March '22, the total market was growing at 14.5% and then Torrent was growing at 22.7%, so about 8 percentage points higher. For Q1, the market was at 12.8% and as per IQVIA, we were at 19.7%. And currently, this quarter, market is at 10%, and we are at 17.8%. So over a long term, Brazil market is a double-digit market, last 6, 7, 8 quarters being a double-digit market. And the delta that we've been maintaining, while for the full fiscal year and the last 2 quarters is in the 7% to 8% range. I think I've seen it in the 5% range in earlier. So I consider 5% and above to be a very healthy level of growth above the market. And I would expect that to continue.

Okay. So you're broadly done with your sales force addition in Brazil and maybe it's now launches and then better penetration, which can help you sustaining this kind of strong outperformance against the market here.

Damayanti, it's a little bit like it's a cycle, right? So we added sales force and we add portfolio, then 2, 3 years down the line, we might add more sales reps. So it's a virtuous cycle.

The next question is from the line of Neha Manpuria from Bank of America.

Sudhir on the 75% gross margin, is this a reflection of the portfolio optimization that we have done in the U.S., and therefore, we should assume that these are sustainable gross margins? Or is there any one-off impact in that we need to consider?

No, there's no one-off impact, Neha. If you remember last quarter, I think there was the same question, which was asked, whether 75%, which we registered in quarter 1 could be sustainable in quarter 2. And I said, yes, and part of it is the cost efficiencies, which we've tried bringing as far as the U.S. business is concerned, which is panning out positively. So I think this should remain...

And do you think there's more headroom for expansion from here based on what we're doing in the U.S. and the new launches in Brazil and stuff like that?

No, I wouldn't take that for the next 2 quarters, Neha. I would remain at where we are.

Understood. And second question on capital allocation. There's a fair bit of -- Torrent has been in the news a fair bit in the last few months. I know you -- obviously, one comment on the news, but just wanted to understand our M&A priorities, what are the focus areas that we're looking at? And what's our comfort when it comes to leverage?

No. So Neha, I think as a policy, we do not comment on any speculative news with respect to any acquisition, I would say. And we would maintain at that -- at this point.

Yes. Fair enough, Sudhir, I'm not asking you to comment on the news. My question is when we're looking at assets, now that Curatio is integrated, is ramping up well, growth in the base business is good, leverage will be less than 1x. So when we're thinking about capital allocation or M&A, what's our comfort leverage that we are okay to take on our books? And second, how should I look at priorities? Would this be the U.S. market, the Brazil market? Or would we focus on the deals that you have done in the past?

Absolutely. I think all the past deals we've done more in India, right? I mean one of the international geographies, we've really done any acquisition for whatever reason it is. Having said that, let's say, if I think of capital allocation in India at INR 100 possibly, if I look at Brazil or some of the other markets, it would not be 100, it will be substantially lower, right? I mean because India is something which we understand properly, and we have a track record of successfully integrating most of the acquisitions, which we've done. So we are more comfortable doing it around India, I would say. That's point number one. I think point number 2 on what kind of debt on leverage, we would be comfortable at. It all depends upon what kind of cash flows are generated by the company, which we are acquiring, right? I mean, both put together, what is the comfort, which we have in terms of the cash flow generation and the cash flow being used for meeting the financial obligations, which are there, still maintaining whatever capital is required for the growth, which is required in the business, right? I mean that's the way to look it. But having said so, I think if you look at the past acquisitions, for example, Unichem, at that point, I think we've gone -- at that point, at the time of acquisitions, we were at around 3x of net debt to EBITDA which came down substantially over the 2 years' time. That's the trend which we believe any branded business acquisition would deliver. And therefore, I would say if at all some acquisition is happening, and we need to look at what we are comfortable at. What I would say is that the starting of 3x is something which should be comforting provided that over the next 2 years, the leverage is coming down substantially, maybe to 1.5x, 2x.

The next question is from the line of Abdul Puranwala from ICICI Securities.

Just on the U.S. front, this quarterly run rate of $30 million. So would it be possible to quantify the Q-on-Q decline in terms of what was one-off impact and the impact of you guys exiting in certain low-margin products?

So actually, I will prefer not to disclose the exact details. But generally speaking, we have single-digit price erosion every -- and then we also launched some volumes due to some contracts being lost and some supply-related issues. So going forward, sales should be in the $30 million to $35 million range, but I cannot guide you further than that.

Sure, sir. And secondly, on India. So sir, if you could share the outlook of the market first and how Torrent will be able to grow because if we see Q2, the market itself has grown 4% organic, the base business growth of 12%. We have significantly outperformed the market. So if you could just share your thoughts on how the market growth is going to pan out for fiscal '24 or '25, if you could throw some light there.

Yes. So we mentioned earlier that we believe the real market growth would be closer to around 7% or 8% this quarter. This would be sequentially higher than the previous quarter because some of the acute therapies seem to have increase in contribution, particularly in our case, for subchronic, there's been a revival in the gastro market. So from Q1 to Q2, there has been an improvement in the market growth. So if we assume that the current market growth is around 7% to 8%, we believe the rest of the year should remain at this level and our delta with the market growth should remain similar. And we don't really see anything different happening in the next year or 2 years. We believe this should -- I mean 2 years is a long time to really comment on right now, but we structurally don't think anything different should be happening. This level of growth should be maintained.

And a final question, if I may. So on the trade generic business, what you had set up quarters ago. So how has been the traction there? Because the 1% to volume growth, which you mentioned, I mean, does that include the trade generic revenues as well? And this number what you have reported and going ahead on the acute side, how do we see some traction building up in this particular segment?