Stable quarter; next growth phase hinges on new ventures
Q1FY21 revenues grew 14.4% YoY to | 563 crore. Export formulations grew 13.8% YoY to | 274 crore. Domestic formulations de-grew 23.4% YoY to | 126 crore as the oncology segment continued to be impacted by lower hospitalisation rate amid pandemic. API segment sales doubled YoY to | 144 crore. EBITDA margins fell 849 bps YoY to 30.4% due to significantly lower gross margin following a change in product mix towards margin dilutive products that was partly offset by lower employee cost and other expenditure. Subsequently, EBITDA de-grew 10.6% YoY to | 171.1 crore. Net profit de-grew 14.2% YoY to | 122.8 crore.
Focused approach in US
Natco has carved out its own identity via tie-ups to tap limited but niche products pipeline including 20 Para IVs filings (FY20). As per the revised and more feasible game plan, it plans to market products via tie-ups with established players in the generic space. Till FY19, the company had filed 51 ANDAs, which includes some niche FTF opportunities. Overall, the management expects one or two complex product launches in the US.
New launches in CND/oncology to drive domestic revenues
Natco is a leading player in the domestic oncology segment with a product basket of ~33 products (FY20). We expect momentum in oncology segment to continue on the back of incremental launches amid pricing pressure in some products. New launches in cardio/diabetology segment (CND) is also expected to support overall growth. Going ahead, the company is looking to launch six to eight products a year. We expect domestic sales to grow at 13.7% CAGR in FY20-22E to | 699 crore.
Valuation & Outlook
Q1 results were better than I-direct estimates on all fronts. Growth in export formulations, API segment was led by stocking exercise for Covid-related products – Oseltamivir, Chloroquine in view of the pandemic situation. The next big US approval will be gRevlimid while there are handful of other US approvals and launches lined up. However, given the current trend in US with niche opportunities being specifically targeted by USFDA to encourage more generic players, this funnel is getting squeezed. In this backdrop, the management is looking to expand in other geographies, businesses (agrochemicals). As per new strategy, specific markets- India, Brazil, Canada, China, agrochemical segment, together are likely to contribute 70-80% of revenues in the next two to three years. This metamorphic shift is likely to see some performance slowdown and fluctuation in near term. The bright spot for Natco is of course its strong balance sheet besides management’s ability to carve out a niche out of the available opportunities. The growth trajectory is likely to improve from FY22 onwards as the new strategy settles down. We ascribe a target price of | 950, which includes base business value of ~| 653 (22x FY22E EPS of | 29.7) + | 297 for NPV of FTF/Para IVs in US.
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