Natco Pharma - Steady growth; Buy - Anand Rathi

Revenue growth to be modest. We expect modest 10.5% yoy revenue growth due to high base and lower revenue from domestic non-oncology formulations business. EBITDA margin could dip 250bps yoy, to 23% due to a change in revenue mix (lower other operating income and domestic revenue). Due to lower revenue and EBITDA margin, along with higher interest cost, we expect adjusted net profit to decline 15.4% yoy.

High base to hit revenue growth. We expect just 9% yoy revenue growth in the API business, due to high base in export API business which we expect to grow at 5% yoy. We expect its formulations business to register 12.6% yoy increase in revenue, led by domestic oncology business, though domestic nononcology business would report a decline of 20.6% yoy as the same would be gradually discontinued. Approval for Lansoprazole OTC version would help accelerate growth in export formulations.

Improving financials. We expect CAGR of 11% in revenue and 17.2% in adjusted net profit, over FY13-16, with EBITDA margin at ~22%. We also expect RoCE to improve from 14% in FY13 to 16.3% in FY16 and D/E to drop from 0.5x to 0.2x by FY15. Successful monetization of para IV opportunities (Lansorazole OTC, Revlimid, Tamiflu, Copaxone, Fosrenol etc) would provide substantial upside to our estimates.

Our take. We expect steady growth to continue in the base business, driven by export formulations and API segment. Recent high court ruling on Copaxone is favourable for Natco as it would allow it to market generic Copaxone May'14 onwards. Approval for para IVs would provide upside to export formulations revenue. We maintain Buy on the stock, with price target of Rs. 946, based on 12x FY15e earnings (and Rs. 518 a share for Para IV opportunities). Risks. Currency fluctuations, regulatory hurdles.

Source : Equity Bulls

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