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Muted revenue growth; agro-chem to aid earnings

NATCO Pharma (NATCO) is an India-based vertically integrated and R&D focused enterprise, engaged in developing, manufacturing and marketing finished dosage formulations and active pharmaceutical ingredients and intermediates

* Natco witnessed 67% revenue growth in H1FY23, owing to robust Revlimid sales.

* EBITDA margins expanded 1436bps to 37% in H1FY23 from 23% in H1FY22 led by strong contribution from export formulations.

• Export formulation business registered a 204% growth in H1FY23 with revenues at Rs. 1020 cr. Brazilian and Canadian subs, backed by strong new launches, have reported robust growth with 40-50% share in profitability.

• In the Crop Health Science Division, the CTPR (Chlorantraniliprole) associated products which were launched are expected to drive earnings in the near-term

• We remain optimistic on Natco’s future profitability backed by the traction in CTPR and Revlimid sales and recovery in domestic formulation.

* Hence, we upgrade our rating to a Buy with a target price of Rs.704 based on 16x FY24E EPS.

Revenue effected by price erosion in the US

An uptick in export formulation, led by Revlimid sales, delivered strong growth of 67% in H1FY23 revenues, with an EBITDA growth of 172%. However, lower contribution in Q2FY23 resulted in a 51% QoQ de-growth of revenues. Export formulations grew 49% YoY while API and domestic formulation businesses degrew 42% and 6% respectively. EBITDA was reported at Rs. 95 cr (up 32% YoY, -76% QoQ) which was mainly driven by the base business. Additionally, EBITDA margins expanded 340bps YoY. Adj. PAT was registered at Rs. 58.6cr.

Growth going ahead..

Although the profit share associated with Lenalilomide product in the US was minimal during the past quarter, it is expected to gain traction by Q4FY23 and Q1FY24. In terms of growth of the domestic business, Natco plans an acquisition in order to fill the gaps in their portfolio. Strong orderbook and new launches in the Brazilian and Canadian subs will aid in continuous growth of the subsidiaries. The launch of Apixaban in Brazil and Canada has seen a rise in profit shares from the subs. The launch of CTPR in the Crop Health Science Division is expected to drive earnings in the future quarters. 50-60% of the revenue is expected to come from B2B. In the pharma specialty space, Natco aims to strengthen the product range through launch of anti-infective therapy molecules

Crop Sciences to drive earnings

In the agro-chemical business front, revenue from Crop Heath Sciences grew 100% to Rs.1 cr. The onset of the Rabi and Kharif season bodes well for the agro business, and is expected to drive sales in the near-term. The management has indicated addition of field force during these seasons to enhance sales.

Outlook and valuation

We expect Natco’s revenue and operating performance to improve on the back of a strong agro sales, focus on US front end business, increased R&D and new launches of niche molecules with high entry barriers. The sale of Revlimid and CTPR promises strong growth in terms of revenue and profitability in the nearterm. Hence, we upgrade to a Buy rating with a target price of Rs.704 based on 16x FY24E EPS

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