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gRevlimid bumps exports; traction in near term…

About the stock: Natco has, over the years, developed a knack for manufacturing complex generic products with few competitors, especially for the US market.

* India formulations mainly comprise oncology products (38 brands). For the US, it follows partnership products for risky launches and acquired Dash Pharma for front-end presence. It has six FDF, two API manufacturing facilities and two crop health sciences units

* Maiden entry into crop protection was via launch of pheromone product, Natmate PBW for controlling pink bollworm in cotton

* FY22 revenue break-up - domestic business: 25%, international business: 62% (mainly from the US), APIs: 13%

Q4FY22 Results: Revenues were buoyed by gains from gRevlimid, in the export formulation segment while Natco booked inventory write-off for Covid products of | 232 crore and provisioning towards estimated credit loss of | 46 crore.

* Sales were up 80% YoY to | 597 crore

* Adjusted EBITDA for one-offs was at | 259 crore, with margins at 43%

* Booked loss of | 50 crore vs. profit of | 53 crore in Q4FY21

What should investors do? Natco’s share price de-grew 0.8x over past five years

* We maintain HOLD rating on the stock due to 1) headwinds continuum in base business (both exports and domestic), 2) high risk-reward play (like Covid drugs) in crop protection and 3) traction from gRevlimid till additional competition sets in seems to be priced-in

Target Price and Valuation: Valued at | 820 (base business at | 730 with 22x P/E on FY24E EPS of | 33.2 + | 90 NPV for gRevlimid).

Key triggers for future price performance:

* US: Momentum likely amid contribution from gRevlimid, key being market formation post new competition. Focus on Para IV and FTF opportunities

* India: Natco is a leading player in oncology segment with 38 products & new launches in cardio/diabetology, expanding portfolio remains key for growth

* 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

* Inorganic opportunities in both domestic and export formulations

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

* Ajanta Pharma is a focused player in the branded space with strategy to launch maximum first time launches with new drug delivery system

* BUY with a target price of | 1955

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