Recommendation From Pharmaceuticals Sectors
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 yeart
HERE IS WHY
Relatively insulated US portfolio
High emphasis on R&D
Robust product portfolio
Natco Pharma Limited (NPL) is engaged in developing, manufacturing and marketing finished dosage formulations and active pharmaceutical ingredients (APIs). The domestic formulation business accounts for about 42 per cent of the company’s revenue, international formulation accounts for about 40 per cent, while API contributes around 9 per cent. With India as its base market, NPL exports to the US, EU, Canada, South East Asia and Latin America.
NPL generally focuses on products that are difficult to formulate and manufacture, and are facing complex legal and regulatory challenges. This approach has paid off well for the company over the long run, with its consolidated revenue and net profit growing 31 per cent and 52 per cent CAGR, respectively, in FY13-17.
The company enjoys leadership position in the domestic oncology and gastrohepatology segments. Its oncology segment has a portfolio of 30 products, covering about one fourth of the domestic market. While the domestic oncology market has grown 13-14 per cent in the last three years, NPL’s oncology business grew about 27 per cent CAGR, fuelled by strong legacy brands and effective distribution channels. NPL has followed the strategy of partnering with global generic players such as Mylan, Actavis Generics, etc., to expand in the US generic market and thus de-risk at various levels on filing, litigation and regulatory processes to secure ANDA approvals. Its partners handle the litigation costs and marketing, while NPL receives a share of the profit for manufacturing the formulations. Given the complexity of its product portfolio and limited competition, NPL’s US portfolio faces relatively lower price risk vis-à -vis its peers.
The company’s R&D capabilities can be witnessed by its complex and niche product filings in formulations. The company utilised around Rs800 crore of the Rs915 crore QIP amount on developing complex generics for the US market and on Indian branded generics.
On the financial front, NPL’s net sales decreased 18.95 per cent to Rs540.3 crore in Q3FY18 as compared to Rs666.62 crore in Q3FY17. Its PBDT grew 11.2 per cent to Rs293.4 crore on a YoY basis in the period under consideration. The net profit of the company increased 10.27 per cent to Rs217.3 crore in Q3FY18 vis-à -vis Rs197.06 crore in Q3FY17. On the valuation front, the company has return on equity (RoE) of 33.01 per cent and return on capital employed (RoCE) of 48.42 per cent. The company ’s PE stood at 25.60x. NPL has a debt-to-equity ratio of 0.13x. The company has been maintaining a healthy dividend payout of 20.06 per cent and also has a good consistent profit growth of 52.17 per cent over the last five years
Considering the performance from molecules like Copaxone, Doxorubicin and Lanthanum in the US and better realisations from domestic and emerging markets, we expect NPL to witness robust growth going forward. Also, the stock has corrected over 20 per cent from its highs in January earlier this year and is looking attractive from the valuation perspective. We recommend a BUY on the stock.
