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Sequential domestic recovery amid Covid sales…

About the stock: Natco is engaged in developing, manufacturing and marketing complex products in niche therapeutic areas.

* Products comprise FDFs, sold in India, US & RoW market as well as APIs, used for captive consumption & customers from international markets

* It has six FDF and two APIs manufacturing facilities to aid 50+ products in domestic FDF, 39 DMFs in APIs and 30+ products in International FDF with 27%, 18% & 46% revenue contribution, respectively.

Q1FY22 Results: Natco reported weak and skewed Q1FY22 results.

* Sales were up 23.8% QoQ, down 27% YoY to | 410.3 crore

* EBITDA in Q1FY22 was at | 109.8 crore, up 44% QoQ, down 35% YoY with margins at 26%

* Consequent adjusted PAT was at | 75 crore (up 41% QoQ, down 38% YoY)

What should investors do?

Natco’s share price has grown by ~1.6x over the past five years (from ~| 632 in July 2016 to ~| 1024 levels in July 2021).

* We retain our HOLD rating on this stock

Target Price and Valuation: We value Natco at | 1040 (base business at | 903 with 40x P/E on FY23E EPS + | 137 NPV for gRevlimid)

Key triggers for future price performance:

* Natco is a leading player in domestic oncology segment with 33 products & new launches in cardio/diabetology segment is expected to support growth

* Growth in FY22 is likely due to multiple high value product launches in the US, rebound in domestic business & contribution from crop division

* The management plans to expand in other geographies & agrochemicals with India, Brazil, Canada, China, agrochemical segment, together likely to contribute 70-80% of revenues in the medium to long term.

Alternate Stock Idea: Apart from Natco, in our healthcare coverage we like Ajanta.

* It is mainly into domestic as well as exports formulations with focus on launching maximum number of first time branded generics launches

* BUY with a target price of | 2695

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