Natco Pharma - Weak quarter; key opportunities intact - ICICI Securities

Natco Pharma's (Natco) reported Q3FY21 performance was much lower than estimates with a miss in India and US revenues. Additionally, weak flu season impacted the Tamiflu sales. Revenue declined 26.3% to Rs3.6bn while adjusted PAT dropped 46.3% to Rs627mn (I-Sec: Rs1.1bn). EBITDA margin was also down 660bps YoY to 23.2% due to low revenue. Continued pressure on domestic oncology segment (~70% of pre-COVID levels) and negligible Tamiflu sales in US were key reasons for weak quarter. However, this doesn't change the FY22-FY23 outlook materially in terms of key product opportunities like Revlimid, Nexavar, Afinitor, etc. Considering ~15% fall in stock price since our downgrade in Dec'20 that has made valuations reasonable, we upgrade Natco to ADD from Hold with a revised target price of Rs945/share.

- Revenue miss across India and US: Export formulation revenue (primarily from the US) were down 26.4% due to absence of Tamiflu sales on account of weak flu season and absence of new launches. Quarterly revenue run-rate has generally been volatile but we believe revenue should revert to ~Rs2-3bn in Q4FY21. We expect delay in competition for generic Copaxone would support the US revenue run rate. ROW markets (Canada & Brazil) revenue would gradually ramp-up aided by new launches including Revlimid. Domestic revenue declined 37.7% YoY due to lower hospital occupancies for cancer treatment and declining Hep-C sales. The business is likely to recover with improving occupancies. APIs grew steady 5.7%.

- Margins weak due to lower revenue: EBITDA margin dropped 660bps YoY to 23.2% on account of significant miss on revenue. However, with gradual pick-up in revenue and high quality product launches in FY22E would help EBITDA margin to revert to ~30%. We believe base EBITDA margin would remain stable at ~30% in the near future. Further delay in Copaxone competition and market share gain would provide an upside to our margin estimates.

- Update on agro-chemicals opportunity: Natco recently received approval for indigenous manufacture of chlorantraniliprole (CTPR) technical which is formulated into broad-spectrum insecticides used in several crops for better pest management. CTPR is currently sold under the brands Coragen and Ferterra which have cumulative market size of ~Rs20bn. We assume Natco would launch this product in FY22E and expect revenue of Rs1.6bn in FY22E and Rs2.7bn in FY23E.

- Valuations and risks: We lower our FY21-FY23 EPS by 2-11% due to weak Tamiflu sales and slow recovery in India business. Considering recent stock correction, we upgrade Natco to ADD from Hold with a SoTP-based target price of Rs945/share (earlier: Rs974/share) including NPV of Rs281/share for Revlimid. Key downside risks: Delay in US launches and early competition in Copaxone.

Shares of NATCO PHARMA LTD. was last trading in BSE at Rs.836 as compared to the previous close of Rs. 854.5. The total number of shares traded during the day was 26221 in over 1853 trades.

The stock hit an intraday high of Rs. 865.1 and intraday low of 832.4. The net turnover during the day was Rs. 22218757.

Source : Equity Bulls

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