Result Update Rating matrix Rating : Hold Target : 378 Target Period : 12 months Potential Upside : 5% Key Financials ( crore) FY11 FY12 FY13E FY14E Revenues 444.9 518.5 635. 727.5 EBITDA 86.8 115.5 14.7 166.6 Net Profit 53.5 59.7 79.7 11.2 Valuation summary FY11 FY12 FY13E FY14E EPS ( ) 17.2 19.2 25.6 32.5 PE (x) 17.9 16.1 12. 9.5 Target PE(x) 18.9 17. 12.7 1. EV to EBITDA (x) 14.9 11.4 9.2 7.6 Price to book (x) 3.1 2.3 2.1 1.8 RoNW (%) 15.2 12.6 14.8 16.2 RoCE (%) 12.4 14. 15.7 17.1 Stock data Market Capitalisation 1125 crore Debt (FY12) 24 crore Cash (FY12) 33 crore EV 1332 crore 52 week H/L 437/197 Equity capital 31.1 crore Face value 1 MF Holding (%) 11.5 FII Holding (%) 5.9 Price movement 6,4 6,1 5,8 5,5 5,2 4,9 4,6 4,3 4, Aug-11 Analyst s name Nov-11 Price (R.H.S) Feb-12 Siddhant Khandekar siddhant.khandekar@icicisecurities.com Krishna Kiran Konduri krishna.konduri@icicisecurities.com May-12 Nifty (L.H.S) Aug-12 45 4 35 3 25 2 15 WHAT S CHANGED August 16, 212 Natco Pharma (NATPHA) 361 PRICE TARGET...Unchanged EPS (FY13E)... Changed from 26.9 to 25.6 EPS (FY14E)...Unchanged RATING...Unchanged Numbers muted but prospects intact Natco reported a muted set of Q1FY13 numbers. Revenues grew 19% to 141 crore (I-direct estimate: 164 crore). The difference was on account of 1) ~18% decline in export APIs and 2) lower other operating income. On the other hand, the oncology segment (32% of sales) registered 72% growth to 43 crore on expected lines. EBITDA margins declined 168 bps to 2.6% (I-direct estimate: 21%) on account of higher employee and power costs. The net profit grew ~22% to 17 crore (I-direct estimate: 19.4 crore). Higher growth vis-à-vis EBITDA growth was on account of lower interest. The quarter s overall performance was also affected by postponement of certain API export shipments to Q2. We maintain our HOLD rating as the stock has factored in most of the positives. Loses Copaxone patent litigation against Teva; no impact on valuation During the quarter, Natco lost its patent litigation case against Teva in a US district court regarding multiple sclerosis drug Copaxone (Glatiramer Acetate). The court rejected both Momenta/Sandoz and Mylan/Natco s claims that Copaxone patents were invalid. According to Teva, generic players may be unable to launch the drug before the expiry of the process patent, which expires on September 1, 215. Approval for Lansoprazole delayed, can come in Q2 The USFDA approval for anti-ulcerant Lansoprazole has been delayed. The management now expects the same in Q2. Post approval, Lansoprazole will be marketed by Actavis and Breckenridge in the US. Total Lansoprazole market size (OTC and prescription) in the US as per rough estimates is ~US$8 million. It is currently a five player market. Growth parameters intact but upside scope limited We expect revenues, EBITDA and net profit to grow at a CAGR of 18%, 2% and 3%, respectively, in FY12-14E. We have valued the base business at 325 i.e. 1x FY14E EPS of 32.5. We expect NPL to stick to its USP of oncology offerings and consolidate its position in this therapy. For the FTFs/Para IV opportunities, our base case value (at 25% probability) stands at 53.3. Thus, our SoTP based target price stands at 378. We recommend HOLD as other than lansoprazole approval there are no immediate triggers. Investors can accumulate Natco at every dip. Exhibit 1: Financial Performance ( Crore) Q1FY13A Q1FY13E Q1FY12 Q4FY12 YoY Gr.(%) QoQ Gr.(%) Revenues 14.8 164.3 117.8 153.8 19.6-8.5 EBITDA 29. 34.5 26.1 25.8 11.1 12.2 EBITDA Margin (%) 2.6 21. 22.2 16.8 Depreciation 4.4 5.2 4. 1.7 1.2 166.9 Interest 4.7 5. 5.5 6.2-14.8-24.8 Reported PAT 17.1 19.4 14. 12.7 21.7 34.9 EPS ( ) 5.5 6.2 4.5 4.1 ICICI Securities Ltd Retail Equity Research
Quarterly Highlights Exhibit 2: Trends in revenues & EBITDA 2 Revenues grew ~19.6% YoY to 14.8 crore, lower than our estimates of 164.3 crore mainly on the back of 18% decline in the exports API business and lower other operating income. However, the oncology business witnessed robust growth of 72% YoY to 42.6 crore. The lower growth in APIs was due to postponement of shipment crore 16 12 8 4 154.6 145.4 133 123 14.8 26.1 3.1 34.1 25.8 29. Revenues EBITDA Exhibit 3: Trends in EBITDA margin & net profit margin EBITDA margins declined 168 bps to 2.6% due to higher employee cost and power cost. EBITDA grew 11% to 29 crore % 25 2 15 1 5 21.2 22.6 23.5 2.6 16.7 13.7 11.4 12. 12.1 8.2 EBITDA Margins Net Profit Margins Exhibit 4: Net profit grows 21% YoY 2 15 14 15.9 19.9 12.65 17.1 Despite lower EBITDA growth of 11%, the net profit increased 21% YoY to 17.1 crore on the back of lower interest cost crore 1 5 Net Profit ICICI Securities Ltd Retail Equity Research Page 2
Exhibit 5: Segment wise performance Q1FY13 Q1FY12 YoY Gr(%) Q4FY12 QoQ Gr (%) Domestic 8.9 8.4 5 2.3 286 Exports 26.2 31.8-18 31.9-18 Total APIs 35. 4.3-13 34.2 3 Domestic - Oncology 42.6 24.7 72 41.9 2 Exports 16. 14.9 8 24. -33 US Retail 24. 19.9 21 21. 14 Domestic Non-Onco & other formulations 16.8 16.3 3 2.6-19 Total Formulations 99.4 75.8 31 17.5-8 The company launched one oncology drug Dasanat and Decita tablets during the quarter, which also led growth in the oncology business Exhibit 6: Trends in oncology business ( crore) 45 41.2 4.6 41.9 42.6 4 35 3 24.7 25 2 15 1 5 Oncology Exhibit 7: API business up 8% YoY Exhibit 8: US retail business grows 1% YoY crore 5 4 3 2 1 4.3 36.7 36.9 34.2 35. crore 3 2 1 19.9 19.3 21.9 21. 24. API US Retail ICICI Securities Ltd Retail Equity Research Page 3
Exhibit 9: Assumptions ( crore) FY11 FY12 FY13E FY14E API Domestic 22.9 31. 38. 41. YoY Growth (%) 68.8 35.2 22.7 8. Exports 83.4 117. 126.7 145.7 YoY Growth (%) 1.7 4.3 8.3 15. Total API 16.3 148. 164.7 186.7 YoY Growth (%) 19.5 39.2 11.3 13.4 Formulation Oncology 121.2 148.4 188.5 216.8 YoY Growth (%) -2.1 22.5 27. 15. Exports 5.5 65.6 17.7 132.6 YoY Growth (%) 113. 29.9 64.2 23.1 US Retail 111.5 82.1 87.4 87.4 YoY Growth (%) -22. -26.4 6.6. Other formulation revenues 6. 74.4 86.6 13.9 YoY Growth (%) -2.2 24.1 16.3 2. Total Formulation 343.1 37.5 47.3 54.8 YoY Growth (%) -2.3 8. 26.9 15. Total consolidated sales 449.4 518.4 635. 727.5 Valuation We expect revenues, EBITDA and net profit to grow at a CAGR of 18%, 2% and 3%, respectively, in FY12-14E. We have valued the base business at 325 i.e. 1x FY14E EPS of 32.5. We expect NPL to stick to its USP of oncology offerings and consolidate its position in this therapy. For the FTFs/Para IV opportunities, our base case value (at 25% probability) stands at 53.3. Thus, our SoTP based target price stands at 378. We recommend HOLD as other than Lansoprazole approval there are no immediate triggers. Investors can accumulate the stock at every dip. Exhibit 1: Valuation table share Base Business (1x FY14E EPS of 32.5) 325 Para IV Opportunities Lenalidomide capsules 28 Glatiramer Acetate Injection 18 Lanthanum Carbonate chewable tablets 4 Oseltamivir Phosphate Capsules 3 Target Price 378 Key risks- 1) Delay in product approvals from USFDA and (2) intensifying price war in the domestic oncology market ICICI Securities Ltd Retail Equity Research Page 4
Exhibit 11: One year forward P/E ( ) 45 4 35 3 25 2 15 1 5 Mar-6 Oct-6 May-7 Dec-7 Jul-8 Feb-9 Sep-9 Apr-1 Nov-1 Jun-11 Jan-12 Price 15.x 13.2x 12.3x 1.5x 6.x Exhibit 12: One year forward PE of company vs. BSE Healthcare Index 35 3 25 2 15% Discount x 15 1 5 Mar-6 Nov-6 Jul-7 Mar-8 Nov-8 Jul-9 Mar-1 Nov-1 Jul-11 Mar-12 Natco Pharma BSE Healthcare Index ICICI Securities Ltd Retail Equity Research Page 5
Financial summary Profit and loss statement (Year-end March) / ( crore) FY11 FY12E FY13E FY14E Total operating Income 455.9 555.6 659.3 757.5 Growth (%) -.2 21.9 18.7 14.9 Raw Material Expenses 177.8 22.9 236.2 272.7 Employee Expenses 64.3 77.8 91.4 98.5 Other expenses 127. 159.4 191. 219.7 Total Operating Expenditure 369.1 44.1 518.6 59.8 EBITDA 86.8 115.5 14.7 166.6 Growth(%) -6.6 33.1 21.8 18.4 Depreciation 15.9 15.8 23. 26.9 Interest 14.2 23.6 2. 18.7 Other Income 8.4 3.5 4.8 8. PBT 65.1 79.6 12.4 129.1 Taxation 13.2 21.1 22.7 27.3 PAT before MI 51.9 58.5 79.7 11.8 Minority Interest -1.6-1.1.1.5 Less: Prior Period Items.... PAT 53.5 59.7 79.7 11.2 Growth(%) 9.9 11.5 33.5 27.1 EPS( ) 17.2 19.2 25.6 32.5 Cash flow statement (Year-end March) / ( crore) FY11 FY12E FY13E FY14E Profit after Tax 53.5 59.7 79.7 11.2 Add: Depreciation 15.9 15.8 23. 26.9 (Inc)/dec in Current Assets -61.7-43.7-35.2-35. Inc/(dec) in CL and Provisions 14.9 23.3 44.9 3.3 CF from operating activities 22.5 54.9 112.4 96.4 Other Investments -2. (Purchase)/Sale of Fixed Assets -83.3-139. -8. -6. Deferred Tax Liability -1.7 3.7 4. 4. Minority Interest -3.9 -.2.1.5 CF from investing activities -91. -135.5-75.9-55.5 Inc / (Dec) in Equity Capital. 3... Inc / (Dec) in Sec Loan Funds 15.5 2. -3. -2. Inc / (Dec) in Unsec. Loan Funds -5.1... Dividend & Dividend tax -6.6-1.9-12.8-14.6 Inc/(dec) in Sec Pre Account. 66... CF from financing activities 93.7 79.9-42.8-34.6 Net Cash flow 25.2 -.6-6.3 6.3 Opening Cash 8.1 33.3 32.7 26.4 Closing Cash 33.3 32.7 26.4 32.7 Balance sheet (Year-end March) / ( crore) FY11 FY12E FY13E FY14E Liabilities Equity Capital 28.1 31.1 31.1 31.1 Reserve and Surplus 324.3 44.9 57.8 594.4 Total Shareholders funds 352.4 472. 538.9 625.6 Total Debt 22. 24. 21. 19. Deferred Tax Liability 25.1 28.8 32.8 36.8 Minority Interest / Others 1.1.9 1. 1.5 Total Liabilities 598.5 741.7 782.6 853.8 Assets Gross Block 354. 473.7 592.7 652.7 Less: Acc Depreciation 1.7 114.7 134.9 158.6 Net Block 253.3 359. 457.7 494.1 Capital WIP 98.7 79. 3. 2. Total Fixed Assets 352. 438. 487.7 514.1 Net Intangibles 16.9 54.1 61.3 68.1 Investments 62.6 62.6 62.6 62.6 Inventory 12.2 11.5 133. 146. Debtors 71. 94.5 14.4 119.6 Loans and Advances 69.2 81.2 83.9 9.7 Cash 33.3 32.7 26.4 32.7 Other Current Assets.1.1.2.1 Total Current Assets 275.8 319. 347.9 389.1 Creditors 98.6 12. 156.6 159.5 Provisions 1.1 12. 2.4 2.7 Total Current Liabilities 18.8 132. 176.9 18.2 Net Current Assets 167.1 186.9 17.9 29. Others Assets.... Application of Funds 598.5 741.7 782.6 853.8 Key ratios (Year-end March) FY11 FY12E FY13E FY14E Per share data ( ) EPS 17.2 19.2 25.6 32.5 Cash EPS 22.3 24.2 33. 41.1 BV 113.1 151.5 173. 2.8 DPS 2. 3. 3.5 4. Cash Per Share 1.7 1.5 8.5 1.5 Operating Ratios (%) EBITDA Margin 19. 2.8 21.3 22. PBT / Total Operating income 14.6 15.4 16.1 17.7 PAT Margin 11.7 1.7 12.1 13.4 Inventory days 73.7 74.9 7. 7. Debtor days 58.2 66.5 6. 6. Creditor days 8.9 84.5 9. 8. Return Ratios (%) RoE 15.2 12.6 14.8 16.2 RoCE 12.4 14. 15.7 17.1 RoIC 1. 1.3 12.1 13.4 Valuation Ratios (x) P/E 17.9 16.1 12. 9.5 EV / EBITDA 15.1 11.5 9.3 7.7 EV / Net Sales 2.9 2.6 2.1 1.8 Market Cap / Sales 1.3 1.1 1.2 1.2 Price to Book Value 2.5 2.2 1.8 1.5 Solvency Ratios Debt/EBITDA 2.5 2.1 1.5 1.1 Debt / Equity.6.5.4.3 Current Ratio 2.5 2.4 2. 2.2 Quick Ratio 2.2 2.2 1.8 2. ICICI Securities Ltd Retail Equity Research Page 6
ICICIdirect.com coverage universe (Healthcare) I-Direct CMP TP Rating M Cap EPS ( ) PE(x) EV/EBITDA (x) RoCE (%) RoNW (%) Company Code ( ) ( ) ( Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E Apollo Hospitals APOHOS 611 715 BUY 8,54 16.3 21.9 27.4 37.4 27.9 22.3 17.8 14.4 11.9 11.7 13.6 15. 8.8 1.4 11.8 Aurobindo Pharma AURPHA 14 11 HOLD 3,45-4.2 15. 19.4-24.5 6.9 5.4 9.9 6.4 5. 7.6 11.5 14. -5.3 16. 17.6 Biocon BIOCON 241 313 BUY 4,84 16.9 18.5 22.4 14.2 13. 1.8 8.4 7.7 6.5 15.9 18.4 19.8 14.9 14.7 15.9 Cadila Healthcare CADHEA 869 936 HOLD 17,877 31.9 38.7 52. 27.3 22.5 16.7 19. 14. 1.8 21.7 24.2 29.1 28.7 28.8 31.4 Divi's Laboratories DIVLAB 1142 166 HOLD 15,223 41.1 5.5 59.2 27.8 22.6 19.3 21.3 16.8 13.3 28.4 29.5 3.5 25.1 25.7 25.1 Elder Pharma ELDPHA 278 342 BUY 573 38. 41.1 61.4 7.3 6.8 4.5 7. 5.8 4.5 1.1 11.8 13.9 1.8 1.5 14.1 Fortis Healthcare FORHEA 11 97 HOLD 4,124 1.8-5. 2. 342.6 NA 38.3 25.6 13.5 11.2 2.1 5. 6. 2.2-6.7 2.6 Glenmark Pharma GLEPHA 415 432 HOLD 11,283 17. 18.8 27. 24.4 22.1 15.4 15.6 15.2 11.5 15.3 18.7 23.2 19.3 19.9 23.9 Indoco Remedies INDREM 6 63 BUY 554 5. 7.1 9. 11.9 8.4 6.6 8.5 6. 5.1 11. 14.2 14.5 12. 14.8 16.2 Ipca Laboratories IPCLAB 41 476 BUY 5,198 22. 27.7 39.7 18.7 14.8 1.3 11.3 9. 7.3 23.5 26.6 28.3 22.1 22.6 25.4 Jubilant Life Sciences VAMORG 163 29 BUY 2,67.6 2.3 32.3 264.6 8. 5. 7. 5.8 4.9 1.7 12.8 14.1.4 12.5 17. Lupin LUPIN 576 617 HOLD 25,861 19.4 26.1 32.5 29.6 22.1 17.7 18.8 14.5 11.6 21. 25.1 27.1 22.1 24.2 24.5 Natco Pharma NATPHA 361 378 HOLD 1,129 19.2 25.6 32.5 16.1 12. 9.5 11.6 9.3 7.7 14. 15.7 17.1 12.6 14.8 16.2 Opto Circuits OPTCIR 148 256 BUY 3,6 23.6 22.9 28.5 6.3 6.5 5.2 7.3 6.2 5.1 19.8 2.2 21.6 33.4 26. 26.2 Strides Arcolab STRARC 78 7 HOLD 4,585 38.5 49.4 58.4 2.3 15.8 13.4 13.3 1.2 8.6 1.4 12.5 14.1 16.4 44.4 14.8 Sun Pharma SUNPHA 667 651 HOLD 69,429 25. 24.8 27.2 26.7 26.9 24.6 2.4 19.2 17.1 29.2 27.7 25.3 21.3 19.3 18.2 Torrent Pharma TORPHA 683 746 BUY 5,81 33.6 47.2 53.3 2.4 14.5 12.8 11.4 9.3 7.7 24.9 27.6 27.9 25.8 3. 27.3 Unichem Laboratories UNILAB 167 171 HOLD 1,515 7.9 13.8 17.1 21.1 12. 9.8 13.3 8.3 6.5 11.6 17.7 2.2 1.3 16. 17.2 Exhibit 13: Recommendation History 45 4 35 3 25 2 15 Aug-11 Oct-11 Nov-11 Jan-12 Feb-12 Apr-12 May-12 Jun-12 Aug-12 Price Target Price Exhibit 14: Recent Releases Date Event CMP Target Price Rating 22-Mar-12 Initiating Coverage 328 352 HOLD 4-Apr-12 Q4FY12 Preview 364 352 HOLD 31-May-12 Q4FY12 Result Update 39 378 HOLD 5-Jul-12 Q1FY13 Preview 347 378 HOLD ICICI Securities Ltd Retail Equity Research Page 7
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Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ANALYST CERTIFICATION We /I, Siddhant Khandekar CA INTER Krishna Kiran Konduri MBA FINANCE research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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