Natco Pharma Ltd 3 rd December, 2012 BUY

What was the Target Price of Natco Pharma in 2012?
What did the increase in revenue and profitability of Natco Pharma due to increased sales of?
What type of product was Natco Pharma promoted as a private company?

Transcription

1 Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Natco Pharma Ltd 3 rd December, 2012 BUY CMP Target Price Rs Rs Natco Pharma was promoted as a private company to be in the business of research, developing, manufacturing and marketing of pharmaceutical substances and finished dosage forms for Indian and International markets. The company began its operations in 1984 in Andhra Pradesh. BSE Code NSE Code NATCOPHARM Market Cap (Rs Cr.) Week High/Low / Industry Pharmaceuticals Face Value Rs Shares O/S EPS Book Value P/E P/B 2.90 Shareholding Pattern The company has registered excellent numbers for the quarter ending September The revenue for the September 2012 quarter zoomed by 42.38% at Rs crore as against Rs crores clocked a year ago. Operating profit surged to Rs croress from the corresponding previous quarter of Rs crores. PAT (excluding exceptional item of Rs.6.18 crores on account of write-off against a pending legal dispute) reported a handsome growth of 70.45% at Rs crores from Rs crores. The growth in revenues and profitability was driven by increased sales of APIs and exports of finished dosage pharmaceutical formulations. Bulk chemicals revenue climbed 57.51% at Rs crores as compared to Rs crores in the corresponding quarter last year and by 61.64% sequentially. Formulations division revenue grew 9.95% sequentially and 17.01% y-o-y at Rs crores. Job work revenues doubled at Rs.3.14 crores as against Rs.1.56 crores (q-o-q) and grew by 34.76% on yearly basis. Natco has acquired 51% of the paid-up equity capital of NATCO Organics during the quarter. Recently, Intellectual Property Appellate Board (IPAB) dismissed AstraZeneca s appeal on lung cancer drug Gefitinib. Gefitinib is manufactured by Natco. Valuation Research Analyst: Vineeta Mahnot [email protected] With consistent growth across all business segments; strong position in oncology market, Natco s growth prospects looks promising. We believe Natco Pharma Ltd. is trading at an attractive valuation at 17.04x and 14.12x of FY13EPS of Rs and FY14EPS of Rs We initiate a BUY on the stock with a target price of Rs.550 (appreciation of about 25%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

2 Business Details Natco Pharma was promoted by V C Nannapaneni in the year 1981 as a private company to be in the business of research, developing, manufacturing and marketing of pharmaceutical substances and finished dosage forms for Indian and International markets. The company began its operations in 1984 in Andhra Pradesh. In the first year of its operations, it achieved a sales figure of Rs 0.5 million. The company's first product was Cardicap, which is an anti-anginal drug. Since then, the company has introduced many dosage forms into the market. By 1985 it had dosage forms in the cardiovascular, anti-cold, anti-asthmatic and antibiotic segments. Business area of the company Natco manufactures a comprehensive range of branded and generic dosage forms, bulk actives and intermediates for both Indian as well as International markets. The product range of the company includes: Diltiazem Omeprazole Lansoprazole Isosorbides Sumatriptan succinate Ondansetron Sertraline Granisetron Paroxetine Newer Quinolones and fourth genaration Cephalosorins The company was ranked 82nd in sales among Indian pharmaceutical companies in Natco also has the credit of being one of the largest contract manufacturers in India. Some of the well-known companies like Ranbaxy, Dr Reddy's Laboratories, John Wyeth, etc. get their products manufactured by Natco. Natco Pharma grew in size when three companies, Natco Parenterals, Dr Karanth Pharma Labs and Natco Laboratories merged with it. Today the company, which began its operations as a single unit with 20 employees, has four manufacturing facilities and employs around 1500 people. It has an on-line data for analysis and decision making. Consistently ranked among the fastest growing pharmaceutical companies in the country, Natco is utilizing its collective experience to kick start its future plans as a global company. For Private Circulation Only 2 Hem Research

3 Growing Industry India's pharmaceutical sector is gaining its position as a global leader. The Indian pharmaceutical industry maintained its momentum and registered a growth of about 15 percent, according to ORG-IMS statistics. This growth can be attributed to prominent factors, such as a growing middle class population, rapid urbanization, increase in lifestylerelated diseases and growth in the health insurance sector. India tops the world in exporting generic medicines worth US$ 11 billion. The size of the Indian formulations market, which currently stands at around Rs 62,000 crore (US$ billion), is growing at per cent annually. The cumulative drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 9,596 million between April 2000 to May 2012, according to the latest data published by Department of Industrial Policy and Promotion (DIPP). India's exports of drugs, pharmaceutical and fine chemicals grew by 27 per cent to Rs 60,000 crore (US$ billion) for the year ended March 2012, according to data compiled by Pharmaceutical Exports Council of India (Pharmexcil). Exports were higher by 27.2 per cent to Rs.6,480.3 crore in the month of June During the June 2012 quarter, exports in rupee terms grew by a robust 37.1 per cent as compared to a 18.6 per cent growth in the year ago quarter. A sharp depreciation in the value of rupee boosted the growth in exports during the quarter. During April-June 2012, exports to US grew by a whopping 47.2 per cent. Exports to UK and Germany rose by 25.8 per cent and 34.6 per cent, respectively. Exports to Russia and Brazil grew by 30.5 per cent and 44.3 per cent, respectively. Drug imports were higher by 42.2 per cent to Rs.1,359.4 crore in the month of June In the June 2012 quarter, drug imports grew by 39.4 per cent to Rs.4,050 crore. The export of drugs from India are expected to grow by 22.7 per cent to Rs.77,747 crore in Drug exports from India are expected to touch Rs.81,889 crore by The pro-generic policies of the developed and developing countries, the reverse engineering skills, price competitiveness and aggressive marketing strategies of the Indian pharma companies are likely to boost exports. Thus, CMIE expects that Indian drug exports to remain strong in the next two years. India imports bulk drugs and chemicals to manufacture formulations. Drugs imports are expected to increase by 22.7 per cent to Rs.17,655 crore in In the first-half of the year, drug imports are likely to have turned costlier due to sharp depreciation in the value of rupee. However, in the second-half, as the rupee is likely to be stronger, imports are expected to become less expensive. Both, the developed and developing countries are increasing their exposure to generic drugs from branded drugs. This will help them to rein in the rising health cost. For Private Circulation Only 3 Hem Research

4 Indian pharma companies are increasingly filing Abbreviated New Drug Approval (ANDAs) application for the approval by the US Food & Drug Administrations (FDA). According to media reports, Indian companies are filing an average of 1,000 ANDAs every year in the US. The share of India in the total bulk drug filings in the US increased from 45 per cent in 2009 to 51 per cent in A number of drugs are expected to go off-patent in the US in the next two years. The multi-billion opportunity through the patent-cliff remains strong until Six new projects were announced in the drugs industry in the September 2012 quarter with a total investment of Rs.1,274 crore. Eight projects with a total investment of over Rs.1,273 crore got commissioned during the September 2012 quarter. In the next two quarters of , 43 projects with a total investment of over Rs.5,847 crore are scheduled to commission. In , 24 projects with an investment of Rs.3,220 crore are scheduled to commission. On the back of increasing middle-class population base, improvements in medical infrastructure and the establishment of IP 6 projects announced in Sept 2012 quarter Qtr ended New Projects Projects Completed Rs. (Nos.) Crores (Nos.) Rs Crores (Nos.) Projects Shelved Rs Crores Sep , Dec , Mar , , Jun , , Sep Dec , Mar , Jun , Sep Dec Mar , , Jun , Sep , , rights, the Indian pharma industry is estimated to grow manifolds. Revenues from the domestic market are also expected to grow at a healthy pace. However, export realization of companies is likely to be hurt due to an expected appreciation in the value of rupee in the second-half. Resultantly, the sales growth of the industry is expected to marginally slowdown in comparison to the first-half of the year. Sales are expected to grow by 14.8 per cent in the December 2012 quarter and by 13.3 per cent in the March 2013 quarter. A strong rupee in the second-half will help to ease the cost pressure on the industry which imports around 40 per cent of its raw material requirements. The PBDIT margin is likely to be in the range of per cent. Industry is expected to earn a net profit of around per cent of total income in the second-half of the year. Furthermore, a 'Pharma Vision 2020' has been prepared by the Department of Pharmaceuticals, for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the department will provide requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. Pharmaceutical companies such as Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the government's ambitious 'Jan Aushadhi' project. In an attempt to commercialise the project, the government is likely to rope in the private sector to bulk-procure generic drugs from them. There are 117 Jan Aushadhi stores across the country and the plan is to expand to at least 600 in the next two years and 3,000 by For Private Circulation Only 4 Hem Research

5 Strong base business Natco pharma s base business has witnessed consistent and strong growth over the years. The API division recorded its one of the best performances in the financial year 2012 at an all-time high of Rs.148 crores in FY12. The management views this segment as one of the key growth drivers ahead. Further, the oncology segment of the finished dosage formulation division also recorded an impressive performance. Natco is the leading player in the niche segment of the oncology market in India with over 15 key products in the portfolio. The company expects FY13 to be a very exciting year and with product approvals; revenues will get a good boost. Further, the company is also considering additional launches in the oncology segment and other therapeutic segments to augment its revenues and profitability. Natco is also looking towards establishing itself in new niche markets such as Brazil, Venezuela etc. For Private Circulation Only 5 Hem Research

6 Launch of Lansoprazole drug sometime soon Natco has filed its abbreviated new drug application (ANDA) for Lansoprazole delayed release capsules with the USFDA in March Lansoprazole is a proton pump inhibitor indicated for the treatment of active duodenal and gastric ulcers and the common symptoms of gastroesophageal reflux disease, including heartburn and erosive esophagitis. The company expects to receive approval shortly and expects to launch its much-awaited anti-ulcer drug Lansoprazole in the US in Oct-Dec quarter. The company has already started preparations and will launch the product as soon as the approval of the US Food and Drug Administration (US FDA) is received. This would make Natco the fifth player in the $700 million-a-year lansoprazole market. For Private Circulation Only 6 Hem Research

7 Consolidated Profit & Loss Account Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Net sales Growth 0.65% 13.13% 20.00% 15.60% Expenditure EBITDA Growth -0.92% 16.67% 26.97% 18.83% EBITDA margin 20.02% 19.70% 20.32% 21.50% 22.10% Other income Depreciation & Amortisation EBIT EBIT margin 16.71% 17.26% 19.73% 21.03% 21.71% Interest PBT Tax PAT Minority interest Adjusted PAT Growth Net Profit margins Extraordinary item Reported PAT Equity Capital Res. & Surplus Equity Shares Adjusted EPS* *On latest equity Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio Book value per share For Private Circulation Only 7 Hem Research

8 Balance Sheet Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Share Capital Reserves & Surplus Shareholders funds Borrowings Deferred tax Liability Minority Interest Sources of funds Gross block Accumulated Depreciation Net block Capital work in progress Investments Projects in progress Inventories Sundry debtors Cash and bank balance Other current assets Loans and advances Total current assets Deferred tax asset Current liabilities and provisions Net current assets Misc exp Uses of funds , For Private Circulation Only 8 Hem Research

9 Quarterly Financial Highlights Rs. Crore Particulars Q2FY13 Q2FY12 Q1FY12 YoY% QoQ% Revenues Expenditures Operating Profit Adjusted Net Profit OPM% bps (211bps) NPM % bps (75bps) Adjusted EPS* *For current no. of equity shares Past Price movement of the stock For Private Circulation Only 9 Hem Research

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