Natco Pharma - Growth recovers; Revlimid remains the key - ICICI Securities

Natco Pharma's (Natco) Q1FY21 performance was above our estimates with 19/20/14% beat on revenue/EBITDA/PAT. Revenue grew 14.4% to Rs5.6bn (I-Sec: Rs4.8bn) while adjusted PAT dropped 14.2% to Rs1.2bn (I-Sec: Rs1.1bn). EBITDA margin was up 220bps QoQ to 30.4%. The revenue growth was led by recovery in domestic formulations business and pandemic related supplies. We expect domestic business to improve further in coming quarters on back of relaxation in lockdown restrictions as Natco supplies most of the products to hospitals. We believe earnings improvement has started in Q1FY21 which would continue. We remain positive on long-term outlook driven by its strong US pipeline including opportunities like Revlimid & Imbruvica and recovery in India business. Considering recently rally in stock, we downgrade Natco to ADD from Buy.

- Revenue beat led by exports APIs: Export formulation revenue (primarily from the US) improved 25.0% QoQ with stable market share in generic Copaxone and additional supplies for pandemic related products. We expect delay in competition for generic Copaxone to FY22, would support the US revenue run rate. ROW markets (Canada & Brazil) revenue would gradually ramp-up aided by new launches. Domestic oncology revenue declined 2.5% YoY mainly due to COVID-19 as hospitals occupancy declined materially in the quarter. The business is gradually recovering as hospital occupancies have started improving.

- Margins improve with cost control: EBITDA margin improved 220bps QoQ to 30.4% vs estimated 30.0% driven by 10/21% YoY/QoQ drop in S,G&A expenses. However, gross margin dropped 1,090bps QoQ due to change in revenue mix with higher API sales and COVID-19 related supplies. We expect growth recovery in domestic oncology business in the coming quarters to help lift margins. We believe EBITDA margin would remain stable at 32-33% in the near future. Delay in Copaxone competition and increase in market share would provide an upside to our margin estimates.

- Outlook: We believe long-term outlook remains strong with big opportunities like generic Revlimid and Imbruvica driving growth in FY22 and beyond. Recovery in domestic oncology and focus on key ROW markets (Brazil and Canada) would support near-term growth resulting in revenue CAGR of 11.4% with stable EBITDA margin of 32-33% over FY20-FY22.

- Valuations and risks: We marginally raise our estimates to factor in higher API sales. However, considering recent stock appreciation, we downgrade Natco to ADD from Buy with a SoTP-based target price of Rs874/share (earlier: Rs782/share) including NPV of Rs158/share for Revlimid opportunity. Key downside risks: Delay in US launches and earlier-than-anticipated competition in Copaxone.

Shares of NATCO PHARMA LTD. was last trading in BSE at Rs.829.35 as compared to the previous close of Rs. 813.6. The total number of shares traded during the day was 50438 in over 2945 trades.

The stock hit an intraday high of Rs. 838.7 and intraday low of 814. The net turnover during the day was Rs. 41734192.

Source : Equity Bulls

Keywords