>Torrent Pharmaceuticals (KARVY)

We recently met up with the management of Torrent Pharmaceuticals (Torrent Pharma) and despite concerns in Germany due to Aok tender and on account of changes in liquidity and de-stocking in the Russian markets, we maintain our marginal growth estimates in these regions. The business growth in Brazil, Europe and Rest of the world (RoW) is on a strong wicket.The company's major margin contributor, the domestic formulations business is back on track with 12% growth in Q3FY09. Chronic therapies such as Cardio Vascular System (CVS), Central Nervous System (CNS) and gastrointestinal accounts for nearly 60% of domestic revenues (>70% of branded formulation segment). We maintain our revenue and margin estimates and slightly downgrade our earnings estimates on account of higher interest cost in FY09 & FY10E and higher capex in FY10E. Despite reduction in EPS estimates by 4.46% in FY 10, we maintain our BUY rating on the stock.

Domestic Formulations business (44% of revenues) is back on track: Completion of inventory correction and realignment of domestic operations has aided the company's growth to double digit in last quarter. With nearly 60-65% of branded formulation revenues coming from chronic areas such as CVS, CNS and Gastro, the company's domestic operations should be growing in excess of market growth rate. We believe the company's domestic formulations space should grow by 7% in FY09 to Rs.6.28bn and by 13% in FY10E to Rs.7.11bn.

Growth prospects of Brazil, Europe & ROW gaining strength: With completion of expansion of field force in all the regions of the country, the Brazil business has stabilized. With 36% growth clocked in the last quarter adjusted for currency depreciation and 12-13 product introductions over the next couple of years, this business appears to be gaining strength. The company's business of dossier selling and contract manufacturing in Europe is gaining mass with estimated revenues of Rs.952.7mn in FY09 and Rs.1143mn in FY10E. Focus on branded promotional business, aided by strong product pipeline and contract manufacturing opportunities in ROW will enable the company to improve its profitability in this high growth market.

Heumann, Russia and CIS (RCIS) markets downside capped: Despite de-growth in German market in Euro terms, the company has grown in this market for 9mFY09 (~15% to Rs.1.93bn). Due to impending new Aok tender, we believe the company may lose certain revenues in sales from Heumann (Germany) but still remain marginally profitable. On RCIS on account of currency depreciation and de-stocking, the company may face payment delays for H2FY09 and FY10E in RCIS markets. However, we believe, the company's focus on Over-the-Counter (OTC) and other prescription based products will enable it to have reasonable revenues and keep debtors in check.

View & Valuation: We maintain our net revenues to grow at a CAGR of 16.3% from Rs.13.5bn in FY08 to Rs.18.3bn in FY10E. The revenue growth will be primarily driven by realignment of domestic branded formulations business
and strong growth from key markets like Brazil and Europe. We maintain our EBITDA margin estimates at 16.9% in FY09 and 17.7% in FY10E. We marginally downgrade our EPS estimates by 2.1% to Rs.22.5 for FY09 and by 4.46% to Rs.25.8 for FY10E mainly due to higher interest charges in FY09 and in FY10E and higher depreciation in FY10. We downgrade our price target by 5% to Rs.200 based on PE of 7.75x FY 10E EPS of Rs.25.8. We reiterate our
BUY rating.

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