Natco Pharma (Natco) missed Q4FY21 revenue/Ebitda 24%/38% as weak flu season and sustained pressure on domestic oncology hit revenue and operating deleverage led to 23% Ebitda margin. The company is entering a period of high growth given: (i) near-term recovery from Covid molecules and everolimus US launch; (ii) possibly two agrochem launches in Q2FY22; and (iii) gRevlimid launch in March 2022 & possibly gNexavar in Q4FY22.
However, uncertainties to domestic oncology, rising competition in current portfolio and limited room for further gRevlimid upgrades restrict us to Hold. We revise target price to Rs 1,045 (from Rs 905) as we roll over to Sep 2022E, add gKyprolis and increase gImbruvica profit share.
Q4FY21 takeaways: Revenue of Rs 3.3 bn dipped 27% y-o-y and 7% q-o-q, while Ebitda at Rs 762 mn plunged 40% y-o-y and 8% q-o-q. Non-existent gTamiflu sales, further pressure on domestic oncology and competition in gDoxil were the reasons for below-par performance. Impact of operating deleverage was seen as margin stood at ~23% – the lowest in 18 quarters.
Base business shrinking; new launches to drive growth: Natco will enter a high growth phase from H2FY22 driven by gRevlimid. Before this, everolimus launch in the US, potential gCoreagen launch in agrochem space and Covid launches like molnupiravir are likely.
While this adds visibility to earnings, several are finite opportunities with best business dynamics between FY23 and FY25 before tapering off sharply. Natco’s current base business comprising domestic oncology has suffered from Covid and needs to recover to sustain current valuations as we see.
Outlook: Opportunities priced in– We value Natco using SOTP giving 22x to base business that yields Rs 540. We value gNexavar, gRevlimid and other P-4 opportunities using NPV that yield a fair value of Rs 505. We maintain ‘HOLD/SN’ with revised TP of Rs 1,045 (Rs 905 earlier).