Lupin vs Torrent Pharma: Which is a better stock for long-term investment?

The pharma sector has been witnessing a strong rally recently with the Nifty Pharma index up almost 9 percent in June and 17 percent since March. However, it was in the red in the first 2 months of the current calendar year. The index has gained nearly 10 percent in 2023 so far and 13 percent in the last 1 year.

Companies are now improving their geographical mix and focusing on shifting from the US to the rest of the world. India is the next margin accretive market for the companies and all pharma companies have taken it to their stride to increase domestic business.

Amid this backdrop, let's analyse, between Lupin and Torrent Pharma, which pharma major has better investment opportunities in the long run.

Stock price trend

In the last one year, both Lupin and Torrent Pharma have outperformed the benchmark Nifty Pharma, however, the former is a slightly better performer between the two. Lupin has rallied over 43 percent in the last 1 year while Torrent has advanced around 32 percent in this period. In comparison, the Nifty Pharma index has added over 13 percent in this time.

However, in 2023 so far, both stocks have delivered over 20 percent returns versus a 10 percent rise in the pharma index. While Torrent Pharma has risen 24 percent, Lupin has advanced 23 percent this year so far.

In 2023, both Lupin and Torrent Pharma have given negative returns in 2 of the 6 months.

Lupin has soared over 12 percent in June after a 13.4 percent rise in May and a 9.4 percent jump in April. However, it fell 1.6 percent and 10.5 percent in March and Feb, respectively. Meanwhile, it was flat but in the green in January, up just 0.5 percent.

Torrent Pharma, on the other hand, has added around 5 percent in June so far after an 11 percent, 7.5 percent and 5.3 percent gain in May, April, and March respectively. However, it shed 4 percent and 2 percent in Feb and Jan, respectively.

But it is important to note that Lupin hit its 52-week high of ₹905.95 today, June 30, 2023. Currently, the stock is trading 50 percent higher than its 52-week low of ₹602.80, hit on August 4, 2022.

Meanwhile, Torrent Pharma, hit its 52-week high of ₹1,981.50, earlier this week, on June 28, 2023. It has also advanced over 40 percent from its 52-week low of ₹1,410.83, hit on June 30, 2022.

Meanwhile, in the long term - in the last 3 years, Lupin has not performed well. It is flat but in the red in this period. Torrent, however, has rallied 65 percent in the past 3 years. Nifty Pharma has also underperformed benchmarks in this time, it is up 38 percent versus an 85 percent rise in Nifty.

Earnings

In the March quarter, Lupin posted a consolidated net profit of ₹236 crore as against a net loss of ₹518 crore in the same period last year. Meanwhile, the company’s total revenue from operation rose 14 percent to ₹4,430 crore in the quarter under review versus ₹4,322 crore in the corresponding period last year.

Nilesh Gupta, Lupin's Managing Director, attributed the continued improvement in operating margins to growth in India, improvement of margins in the United States and growth in other segments including APIs (active pharmaceutical ingredients). He added that in the US, Lupin improved its margins for the third quarter in a row by maximizing portfolio, optimizing expenses, and more focused R&D (research and development) investment into complex products. The new year would see a push across regions, especially India and the US, aided by the company’s recent sales force expansion and new product launches, respectively, he further noted.

Meanwhile, for the full year FY23, the company posted a net profit of ₹430 crore, as compared to a loss of ₹1,528 crore in FY22. Its consolidated revenues for FY23 marginally rose to ₹16,641 crore from ₹16,405 crore in the corresponding period last year.

Torrent Pharma, on the other hand, posted a consolidated profit of ₹287 crore for the fourth quarter ended March 2023 versus a net loss of ₹118 crore in the same period last year. Its revenue rose 17 percent to ₹2,491 crore for the fourth quarter as compared to ₹2,131 crore in the year-ago period.

During the full financial year FY23, its net profit rose 60 percent to ₹1,245 crore from ₹777 crore in FY22. Its revenue also rose 13 percent to ₹9,620 crore versus ₹8,508 crore in FY22.

Which one should you bet on for the long term?

Vinit Bolinjkar, Head of Research, Ventura Securities, has picked Lupin between the two.

Lupin has received approval for a generic version of Spiriva HandiHaler (Tiotropium Bromide Inhalation Powder) from USFDA in the US Market. The estimated size of this drug is $1,246 million in US market. Further developments in business could add value in the business like new launches in the US market such as Darunavir, Cynocobalamin, Diazepem Gel, Vereniciline, Bromfenac etc. excluding gSpirva. Add to it double-digit growth in India business as the company already increased MR numbers to 1,000. Lupin trades at 19.3x FY25 P/E.

Torrent Pharma, on the other hand, draws a large share of its revenue from India and Brazil wherein it generates higher gross margins. In India, the company is already performing on the back of its strong brands. In Brazil, the company is expected to grow on the back of an increase in MR strengths for CNS, generics segment growth and new product launches. The company expects strong pricing growth: IPM’s growth has been driven consistently by an average pricing growth of 6.3 percent YoY every month for the industry. At the same time, Torrent Pharma expects a 7-8 percent price rise over the next few quarters. The stock trades at 24.5x FY25 P/E.

Urmi Shah, Research Analyst, SAMCO Securities, also likes Lupin between the two.

Between Lupin and Torrent Pharma, Lupin is witnessing a promising turnaround story. Meanwhile, Torrent Pharma already has a strong financial history. Investors can wait for the financials of Lupin to strengthen before investing. Pharma sector has started witnessing a rally recently. Companies are improving their geographical mix, now focus shifting from the US to the rest of the world. India is the next margin accretive market for the companies and all pharma companies have taken it to their stride to increase domestic business. Biocon, Syngene, and Torrent Pharma are some of my top picks in the pharma space.

In a contrary opinion, Suman Bannerjee, CIO, Hedonova, has chosen Torrent Pharma over Lupin

I feel Torrent Pharma could be a better option in the long run. It has maintained a strong track record of profitability in recent years and its established position in the pharmaceutical industry. In fact, in the complete fiscal year of 2022-23, Torrent Pharma achieved a net profit of ₹1,245 crore, demonstrating a significant increase of 60 percent compared to the previous fiscal year's net profit of ₹777 crore.

Nirav Karkera, Head of Research at Fisdom, also likes Torrent Pharma more than Lupin.

Lupin

The recent approval of gSpiriva from the USFDA is the most recent tailwind with expectations that the same will help gain a larger market share and bump revenues meaningfully. While lower input and logistics cost along with cost optimisation measures across units and an expected uptick in US business margins are expected to aid margin growth. However, such recovery is highly contingent on the effective execution of plans. Business and bottom-line growth in the US on account of exclusive generic products lends quite an optimistic outlook for the company. However, most such growth prospects seem to be aggressively priced into the valuations. While there clearly is scope for further upside through the shorter period, it may not be as steep as witnessed through the past couple of months.

From a technical analysis standpoint, the daily chart is trading in a higher high higher low formation and sustaining above its 21 & 50 - day exponential moving average. Prices have recently witnessed a rectangle pattern breakout on the broader time frame and trading above the upper band of the pattern. Presently, the oscillator and indicators are in the buy mode which supports the bullish price action movement. One can enter long at dips near 860 levels with support near 820 levels and on the higher side prices have the potential to reach 1000 & 1050 levels.

Torrent Pharma

Torrent Pharma’s recent acquisition of Curatio is expected to continue contributing positively to the top line. However, the acquisition can be expected to exert meaningful stress on the company’s balance sheet. The acquisition and new launches in chronic therapies bolster revenue growth in domestic markets while new launches and development in the generic segment aided growth in the Brazilian segment. Torrent Pharma is expected to strengthen its presence and gain stronger traction in domestic and Brazilian markets, especially on the basis of anticipation of a stronger performance by key brands and new product launches. German and US businesses are expected to develop at a reassuring pace going ahead. Regulatory risks continue to feature as a key challenge to growth prospects. However, considering current valuations and growth prospects, the stock presents meaningful upside potential for investors over a period.

From a technical standpoint, the broader time frame has witnessed a strong rally post-forming a hammer candle stick formation on 3rd March. Prices are trading at a higher high formation and sustaining above their short and medium-term averages.

On the weekly chart, prices have shown a sharp V shape reversal pattern and registered a new life high at 1984.25 levels. Presently the momentum oscillator RSI (14) on the daily chart has overheated and reached near its overbought zone (85). Technically the stock is in a dominant bull run but a marginal profit booking at current levels cannot be ruled out. One can enter long at dips near 1860 - 1830 levels with support near 1770 levels and on the higher side prices have the potential to reach 2100 & 2300 levels.

Investors must evaluate for their own suitability and base investment decisions basis own convictions though.