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Weak quarter; India business recovers

Natco Pharma’s (Natco) Q1FY22 performance was below estimates with a miss in exports and API revenues. However, India business recovered well with recovery in oncology business and upside from covid-19 related portfolio. Revenue declined 27.2% to Rs4.1bn while adjusted PAT dropped 38.9% to Rs750mn (I-Sec: Rs928mn).

EBITDA margin was also down 360bps YoY to 26.8% due to lower revenue. Continued pressure on domestic oncology segment, though recovering sequentially and weak exports sales 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. Adverse ruling in CTPR, agro-chemical product, has delayed the opportunity and we now expect material revenue from FY23E. Retain HOLD.

* Domestic recovers, exports remain weak: Export formulation revenue (primarily from the US) was down 47.0% due to weak flu season, competitive pressure and lack of new launches. Quarterly revenue run-rate has generally been volatile but we believe revenue should revert to ~Rs2bn in H2FY22. 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 grew 59.7% YoY due to lower base and upside from covid-19 related products. The oncology business is likely to recover with pick-up in hospital occupancies and chemo-therapy treatments with increasing patient footfalls.

* Lower revenue impacted margins, likely to recover in H2FY22E: EBITDA margin dropped 360bps YoY to 26.8% 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: We expect domestic oncology business to recover in FY22E coupled with high value launches in US which would support export sales. Favorable court ruling in agro-chem product chlorantraniliprole (CTPR) in Spe’21 may help in ramping-up agro chemical business. We expect 29.4% revenue and 66.6% PAT CAGR over FY21-FY23E including Revlimid sales in FY23E.

* Valuations and risks: We largely maintain our estimates and considering fair valuations, retain HOLD rating with a SoTP-based revised target of Rs1,030/share (earlier: Rs1,109/share) including NPV of Rs260/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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