NATCO Pharma's Q2FY19 results (Outperformer) - Good quarter; announces buyback
Q2FY19 result highlights
- Natco reported higher sales of Rs5.4b (+27% yoy) vs est of Rs5.1b. The surprise was driven by higher other operating income – Rs540m
- Formulation exports came in line at Rs2.48bn (Rs2.36bn in Q1) driven by profit share on key drugs including gTamiflu, gCopaxone etc. Domestic biz continues to inch by steadily with continued momentum in oncology sales and stabilization in Hep-C sales.
- Natco reported higher EBITDA of Rs2.2bn (+81% yoy) vs our est of Rs1.9bn. EBITDA margin came in higher at 40.6% (vs 40.4% in Q1) vs est of 37.3%. GMs stood lower at 82.5% (vs 83.8% in Q1; est of 84%).
- Other income stood higher at Rs400mn vs est of Rs200mn. Natco reported PAT of Rs1.83bn vs est of Rs1.48bn.
- Company has Rs11.4bn net cash on books. The positive verdict on gCopaxone 40mg appeals case eliminates potential risk of payment of damages. Board has announced a buyback of Rs2.5bn upto Rs1000/share. The promoters wouldn’t participate. At CMP, it implies a capital reduction of ~1.8% in case the option is fully utilized.
- 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: Higher other operating and higher other income
Impact on financials: Maintain earnings estimates
Valuations & view
With a series of positive developments over last 4-6 quarters Natco has been having a dream run. 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.
NATOCO is mainly engaged in the manufacture and sale of paints, ink, plastics and fine chemical products and sales of related products. Co. operates in three business segments. Paint segment is engaged in the purchase and sale of paint-related products, and the manufacture and sale of synthetic resin paints. Fine Chemical segment is engaged in the manufacture and sale of high functional resin and various functional micro particles. Thinner segment is involved in the manufacture and sale of thinner as well as the collection, transportation and treatment of industrial waste. As of Oct 31 2017, Co. has five subsidiaries.
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