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Natco Pharma Ltd>
  • CMP : 1,210.6 Chg : 34.15 (2.90%)
  • Target : 565.0 (6.60%)
  • Target Period : 12-18 Month

15 Feb 2023

Steady performance; focus shifts to crop protection…

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 (39 brands). For the US, it follows partnership products for risky launches and acquired Dash Pharma for a 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
  • Q3FY23 revenue break-up - domestic business: 20.7%, international business: 68% (mainly from the US), APIs: 11.3%

In line revenues but margin beat

  • Revenue declined 12% YoY to ₹ 493.3 crore
  • EBITDA improved 4.8% YoY to ₹ 106.7 crore and margins increased 347 bps YoY to 21.6%
  • Adjusted PAT declined 22.5% YoY to ₹ 62.3 crore
What should Investors do?

Natco’s share price de-grew at 7.77% CAGR over the past three years.

  • We maintain HOLD rating on the stock due to 1) impending competition in gRevlimid in US and other complex products, 2) high risk-reward play in crop protection with possible new entrants and 3) stagnancy in domestic formulations, especially oncology (scouting for a decent domestic target)
Target Price and Valuation

Valued at ₹ 565 (base business at ₹ 481 with 16x P/E on FY25E EPS of ₹ 30 + ₹ 83 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 and crop protection with India, Brazil, Canada, China, crop protection 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 a strategy to launch maximum first time launches with new drug delivery system
  • BUY with a target price of ₹ 1385

Key Financial Summary

Particulars FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E FY25E 2 Year CAGR (FY23E-FY25E)
Revenues 1,915.0 2,052.1 1,944.8 -1.2 2,583.0 2,973.7 2,685.3 2.0
EBITDA 582.6 606.2 263.5 -17.4 908.7 1,008.6 783.0 -7.2
EBITDA Margins (%) 30.4 29.5 13.5 - 35.2 33.9 29.2 -
Net Profit 460.8 440.9 170.0 -18.9 665.8 737.4 550.3 -9.1
EPS (|) 25.2 24.1 9.3 - 36.4 40.3 30.1 -
PE (x) 21.0 22.0 57.1 - 14.6 13.2 17.6 -
EV to EBITDA (x) 17.0 15.7 36.8 - 10.2 8.8 10.5 -
RoNW (%) 12.2 10.7 4.0 - 13.9 13.6 9.4 -
RoCE (%) 14.0 13.1 4.6 - 16.0 16.5 11.5 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q3FY23 Results: In line revenues but margin beat

  • Revenue declined 12% YoY to | 493.3 crore. On the operational front, EBITDA improved 4.8% YoY to | 106.7 crore and margins increased 347 bps YoY to 21.6%. Adjusted PAT declined 22.5% YoY to | 62.3 crore. Segmental mix includes domestic formulations, which were up 0.5% YoY to | 101.1 crore while export formulations and API business were impacted, both down 12.9% YoY to | 333.7 crore and 31% YoY to | 42.6 crore, respectively
  • Q3 numbers were better on the margins front while revenues were in line. Sequential recovery was visible in domestic formulations (mainly oncology), which is struggling since the Covid outbreak. The company also registered meaningful revenues in the agrochemical space but the quantum is still small. Overall, competitive scenario in the US generics and pricing pressure in the domestic oncology business has forced the company to explore the branded agrochemical space, which is a long-drawn strategy

Q3FY23 Earnings Conference Call highlights:

Revenue division:

  • Strength remains in regulated markets for the company
  • It intends to reduce dependency on US markets and diversify into other geographies
  • The company has been awarded new tenders in Asian markets including Malaysia and Thailand under export formulation division
  • Agrochemical division is in an upward trajectory and has given a reasonable start. It is expected to deliver well due to the coming Kharif season. The management has guided for | 150-200 crore revenue contribution in the next 12 months from this business. The same will be driven by both branded India business and exports

Product Pipeline:

  • The company has made filings under para IV drugs for which it is expected to reveal the pipeline in Q4FY23
  • Many patents are There with the company till FY25. These are expected to be the value creator due to limited market suppliers in that space
  • Brazil has 12 launches in the coming year, followed by a couple of launches in Canada. Launched Nat-Lenalidomide in the Canadian market
  • It is targeting 10 product launches a year with over 12% growth under domestic formulation segment
  • It has also guided to strengthen the gastroenterology, critical care, oncology and cardiodiabetes portfolios under domestic formulation

Other highlights:

  • It is willing to look for an inorganic growth opportunity in India
  • The management expects gRevlimid traction in Q4FY23 and Q1FY24
  • B2B customers in the agrochemical division are all lined up, which contributes 30% of sales generation. Rest 60-70% sales are derived from the company level
  • The management has guided that it will witness some uptake from the UP region due to good sugar production
  • Growth is expected to come from the base business and from niche complex filings, which will boost earnings
  • It launched first generic of Abiraterone tablets in Taiwan and Indonesia
  • Plans to launch new divisions to penetrate in various therapies and has also increased field force as a part of expansion plan
  • Q4FY3 is expected to deliver a better performance due to higher contribution from gRevlimid and agrochemical products
  • In Brazil, continued to increase its presence in the oncology and primary healthcare segments with a strong market share in both Everolimus and Oseltamivir
  • Increasing its presence in Singapore with tenders
  • The management expects CTPR traction in crop care to generate momentum in the coming quarters
  • The company experienced price erosion in the US



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