NATCO Pharma's Q1FY19 results (Outperformer) - Below estimates led by lower profit share

Q1FY19 result highlights

• Natco reported lower sales of Rs5.4b (-21%/30% yoy/qoq) vs est of Rs6.5b led by lower profit share of Rs2.1bn (Rs4.33bn in Q4) vs our est of Rs3.3bn. Mgmt indicated that a reasonable amount of profit share has been deferred and will be booked in Q2
• Led by lower revenues Natco reported lower EBITDA of Rs2.2bn (-43% qoq) vs our est of Rs3.06bn. EBITDA margin came in lower at 40.4% (vs 49.9% in Q4) vs est of 47.1%. GMs stood better at 83.8% (vs est 82.5%).
• Employee expenses came inline at Rs0.89b. SG&A cost stood at Rs1.45bn (-4% qoq) vs est of Rs1.4bn
• Other income was at Rs359mn (includes Rs140m forex gains) vs est of Rs250mn. Natco reported PAT of Rs1.8bn vs est of Rs2.4bn.
• Natco continues with guidance of base FY19 revenue and PAT growth guidance of 8-10% driven by gCopaxone and gTamiflu. For FY20, mgt guided that higher contribution from Brazil, Canada and India markets will likely make up for the profit erosion in gCopaxone and gTamiflu.

Key positives: Steady SG&A cost, higher other income

Key negatives: Lower revenues

Impact on financials: We have reduced our FY19E/20E earnings est by 12%/ 3% to account for slower ramp-up in gCopaxone

Valuations & view

With a series of positive developments including the much awaited approvals / launches for gCopaxone 20mg and well as 40mg, blockbuster gTamiflu FTF launch, approval for niche drugs like Doxil and continued strength in domestic business Natco has had a dream run over last few quarters. With proven R&D capabilities post successful launch of multiple complex generics and a much stronger balance sheet,  Natco has now created a strong platform to make relatively aggressive investments (vs the past) to move into the next growth orbit. Along with gCopaxone, anticipated launches of gNexavar and gRevlimid accompanied with the scale-up in India and RoW markets will keep up the earnings momentum over the next 3-5 years. The forthcoming stepped-up investment phase will enable the company to create new medium to long growth drivers. Maintain Outperformer.