loader2
Login Open ICICI 3-in-1 Account
Open ICICI 3-in-1 Account
  • CMP : 914.6 Chg : -0.25 (-0.03%)
  • Target : 735.0 (13.78%)
  • Target Period : 12-18 Month
Result Update

13 Aug 2022

gRevlimid drives Q1; focus shifts to other drivers…

About The Stock

Natco has, over the years, developed a knack for manufacturing complex generic products with few competitors, especially for the US market.

  • India formulations mainly comprise oncology products (38 brands). For the US, it follows partnership products for risky launches and acquired Dash Pharma for front-end presence. It has six FDF, two API manufacturing facilities and two crop health sciences units
  • Maiden entry into crop protection was via launch of pheromone product, Natmate PBW for controlling pink bollworm in cotton
  • FY22 revenue break-up - domestic business: 25%, international business: 62% (mainly from the US), APIs: 13%
Q1FY23

Revenues were buoyed by gains from gRevlimid, in the export formulation segment as almost all the gains were booked from gRevlimid supplies, next leg of gRevlimid profits are expected in Q4FY23 and Q1FY24.

  • Sales were up 116% YoY to ₹ 884.6 crore
  • EBITDA was at ₹ 395.3 crore, with margins at 44.7%
  • Adjusted PAT was up 327% YoY to ₹ 320.4 crore
What should Investors do?

Natco’s share price grew 1.2x over past three years.

  • We maintain HOLD rating on the stock due to 1) impending competition in gRevlimid in US and lack of other growth drivers, 2) high risk-reward play in crop protection with ~ ₹ 100 crore of CTPR inventory and 3) stagnancy in domestic formulations, especially oncology
Target Price and Valuation

Valued at ₹ 735 (base business at ₹ 634 with 15x P/E on FY24E EPS of ₹ 42.3 + ₹ 100 NPV for gRevlimid).

Key Triggers for future price performance
  • US: Momentum likely amid contribution from gRevlimid, key being market formation post new competition. Focus on Para IV and FTF opportunities
  • India: Natco is a leading player in oncology segment with 39 products & new launches in cardio/diabetology, expanding portfolio remains key for growth
  • Plans to expand in other geographies & agrochemicals with India, Brazil, Canada, China, agrochemical segment, together likely to contribute 70-80% of revenues in the medium to long term
  • Inorganic opportunities in both domestic and export formulations
Alternate Stock Idea:

Apart from Natco, in our healthcare coverage we like Ajanta.

  • Ajanta Pharma is a focused player in the branded space with strategy to launch maximum first time launches with new drug delivery system
  • BUY with a target price of ₹ 1495

Particulars

Particulars (₹ crore) Amount
Market Capitalization 16,381.4
Debt (FY22) 412.0
Cash (FY22) 206.0
EV 12,004.0
52 week H/L (₹) 1,445.9/726.8
Equity Capital 35.8
Face Value (₹) 2.0

Price Chart

Recent Events & Key Risks

  • US launch of gRevlimid
  • Key Risk: (i) Competition in US key products (ii) Better market share gain for new launches

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 2,094.5 1,915.0 2,052.1 1,944.8 -1.2 2,673.8 2,807.2 20.1
EBITDA 794.8 582.6 606.2 263.5 -17.4 1,014.9 1,057.1 100.3
EBITDA Margins (%) 37.9 30.4 29.5 13.5 - 38.0 37.7 -
Net Profit 644.4 460.8 440.9 170.0 -18.9 758.8 771.4 113.0
EPS (|) 35.3 25.2 24.2 9.3 - 41.6 42.3 -
PE (x) 18.3 25.6 26.8 69.4 - 15.5 15.3 -
EV to EBITDA (x) 14.8 20.6 19.2 44.8 - 11.1 10.0 -
RoNW (%) 18.5 12.2 10.7 4.0 - 15.5 13.9 -
RoCE (%) 21.3 14.0 13.1 4.6 - 18.0 16.9 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: gRevlimid drives revenues, margins in Q1

  • Revenues grew 116% YoY to | 885 crore driven by 407% YoY growth in the export formulation business to | 737 crore, mainly on the back of gRevlimid sales. This was partly offset by de-growth of 55% YoY in the domestic formulation business to | 89 crore and 17% YoY decline in APIs to | 51 crore. EBITDA margins were up 1793 bps YoY at 44.7% while EBITDA grew 260% YoY to | 395 crore. Profit for the quarter increased 327% YoY to | 320 crore in Q1FY23. The Board of Directors has declared an interim dividend of | 3.5 per equity share during Q1FY23
  • Natcos numbers in Q1 were better than our estimates as both revenue and margins grew on account of a sharp uptick in exports for gRevlimid to US. The bump in profit share income for gRevlimd is on account of almost all gains being booked in the two consecutive quarters. We expect this to taper down in Q2 and Q3 of FY23. The company remains focused on the export business of gRevlimid to drive growth but post the generic entry, opportunity is expected to be squeezed significantly. Going forward, launch momentum in the US post gRevlimid and traction for domestic business (organic/inorganic) remain key aspects to watch

 

Q1FY23 Earnings Conference Call highlights

  • Natco has booked almost all gains (profit share and manufacturing margin) in Q4FY22 and Q1FY23 for gRevlimid supplies to US as it is supplied on campaign basis. Traction from gRevlimid is expected to diminish significantly in Q2 and Q3. The next supplies expected in Q4FY23 will see improvement, Natco books manufacturing margin when supplies happen and profit share when sales take place. Copaxone market share is at steady state although volumes have declined in US
  • The management is focused on the R&D earmarked to oligo-peptide and oncology products. Natco is looking to file eight to 10 products in FY23
  • The domestic business is steady but not growing. The management is looking to move out from its niche presence. The company is looking for acquisitions in the domestic business and will look to close a transaction this year. The management is looking to acquire a business with a turnover of more than | 100 crore and in the space of physician and general physician
  • On the crop protection side, Natco has invested | 165 crore on the facility and is currently holding | 108 crore of agro inventory. Judges have appointed third party experts for verification whether Natco has infringed process patent for CTPR. The company cannot launch till verdict. Agro business (ex-CTPR) is expected to do | 10-12 crore in FY23
Variance Analysis:

  Q1FY23 Q1FY22 Q4FY22 YoY (%) QoQ (%)   Comments
Revenue 884.6 410.3 596.8 115.6 48.2   YoY increase due to uptick in exports contribution from gRevlimid
Raw Material Expenses 147.7 79.1 296.3 86.7 -50.2    
Employee Expenses 151.9 108.1 109.3 40.5 39.0    
Other Expenditure 189.7 113.3 209.8 67.4 -9.6    
Total Operating Expenditure 489.3 300.5 615.4 62.8 -20.5    
EBITDA 395.3 109.8 -18.6 260.0 LP    
EBITDA (%) 44.7 26.8 -3.1 1793 bps 4780 bps   EBITDA margins improved mainly on back of change in revenue mix towards more renumerative gRevlimid 
Interest 4.2 2.0 6.7 110.0 -37.3    
Depreciation 39.6 33.8 38.1 17.2 3.9    
Other Income 34.3 17.0 13.8 101.8 148.6    
EO 0.0 0.0 0.0 0.0 0.0    
PBT 385.8 91.0 -49.6 324.0 LP    
Tax  65.4 16.0 0.9 308.8 7,166.7    
PAT before MI 320.4 75.0 -50.5 327.2 LP    
MI 0.0 0.0 0.0 0.0 0.0    
Adj.Net Profit 320.4 75.0 -50.5 327.2 LP    
Key Metrics              
Domestic formulations 89.5 201.1 76.9 -55.5 16.4   YoY decline amid high Covid contribution in base of Q1FY22
Export Formulations 736.9 145.4 465.1 406.8 58.4   YoY increase due to gains from gRevlimid 
APIs 50.8 61.6 48.6 -17.5 4.5    

Disclaimer

ANALYST CERTIFICATION

I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stocks price movement, outstanding positions, trading volume etc as opposed to focusing on a companys fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research. 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. 

RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock

Buy: >15%

Hold: -5%to 15%;

Reduce: -15% to -5%;

Sell: <-15% 

Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com
Read More
✕
Application status