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Weak quarter; set for strong FY22

Natco Pharma’s (Natco) Q4FY21 performance was much lower than estimates with a miss in India and US revenues. Additionally, weak flu season impacted sales from Tamiflu. Revenue declined 27.2% to Rs3.3bn while adjusted PAT dropped 43.7% to Rs530mn (I-Sec: Rs1.0bn). EBITDA margin was also down 520bps YoY to 23.0% due to low revenue. Continued pressure on domestic oncology segment 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, Everolimus, etc. Agrochemical business is likely to become a new revenue segment over next few years and capex for it is complete. Considering recent rally in stock which has factored in these upsides, we downgrade Natco to HOLD from Add.

Revenue miss across businesses:

Export formulation revenue (primarily from the US) was down 21.0% due to absence of Tamiflu sales on account of weak flu season and lack of new launches. Quarterly revenue run-rate has generally been volatile but we believe revenue should revert to ~Rs2-3bn in Q1FY22. 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 19.4% YoY due to lower hospital occupancies for cancer treatment and declining Hep-C sales. The business is likely to recover with pick-up in hospital occupancies and chemo-therapy treatments with increasing patient footfalls. Launch of agro-chemical and COVID-19 linked products in the coming months would also support domestic revenue.

Lower revenue impacted margins, likely to recover in FY22E:

EBITDA margin dropped 520bps YoY to 23.0% on account of significant decline in revenue. However, with gradual pick-up in revenue and high quality product launches (Everolimus, Sorafenib, etc.) in FY22E would aid EBITDA margin reversion to ~30%. We believe base EBITDA margin would remain stable at ~30% in the near future

Outlook strong:

We expect domestic oncology business to recover materially in FY22E coupled with high value launches in US which would support export sales. Favorable court ruling in agro-chem product chlorantraniliprole (CTPR) would help in ramping-up agro chemical business. We expect 31.1% revenue and 68.9% PAT CAGR over FY21-FY23E including Revlimid sales in FY23E. We raise revenue and earnings by 4-5% in FY23E with incremental sales in the agro-chem business.

Valuations and risks:

We remain positive on the company’s business with improving visibility of growth. However, considering recent stock rally which has capped the upside, we downgrade Natco to HOLD from Add with a SoTP-based target of Rs1,109/share (earlier: Rs885/share) including NPV of Rs297/share for Revlimid and Rs77/share for Imbruvica. Key downside risks: Delay in US launches and early competition in Copaxone. Key upside risks: Swift ramp up in US launches and better than estimated revenue in the agro-chem segment

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