Natco Pharma: 40-68% PAT growth in FY24. PAT growth of 109% & Revenue growth of 65% in H1-24 at a PE of 12
Strong earnings growth cycle started in FY23. Positive outlook for growth till FY26. At attractive valuations. Opportunities for re-rating & multi-bagger returns.
1. Pharmaceutical company
natcopharma.co.in | NSE : NATCOPHARM
Well established player in oncology with brands catering to diseases including breast, bone, lung and ovarian cancer
Focused on complex generics for the US Markets with niche Para IV and Para III filings
Targeting growth in Crop Health Sciences business with state-of-the-art manufacturing facilities for both technical and formulation
Business Segments
2. FY18-23: Top-line & bottom line trended down with growth after many years in FY23
3. Strong FY23: PAT up 321% and Revenue up 38% YoY
4. Strong Q1-24: PAT up 31% and Revenue up 26% YoY
5. Strong Q2-24: PAT 550% & Revenue up 134% YoY
6. Strong H1-24: PAT up 109% & Revenue up 65% YoY
PAT Margin expansion of 8% YoY
7. Business metrics: Improving return ratios
Margin expansion in FY23 reflected in improvement of return ratios
8. Outlook: PAT growth of 40-68% in FY24
i. FY24: PAT growth of 40-68%
Rs 1,000-1200 cr of PAT in FY24 implies a PAT growth of 40-68% over the Rs 715 cr PAT in FY23.
our expectation is that we'll do more than INR1,000 crores -- between INR1,000 crores to INR1,200 crores of PAT this year.
ii. Q3-24 expected to be a weak quarter
December will be a little on the weaker side and things will pick up March.
iii. Management positive about FY25 and FY26
Management is pointing towards growth in FY25 and FY26 which is reassuring given that the top-line & bottom line trended down from FY18-22 with the first year of clear growth in FY23
Next financial year, I think it will all depend on how the pricing environment is. I think we'll give more color to it, I think, closer to the end of the year. But we are expecting that we should do well in the following couple of years. I think that was the general broad trajectory of the business. And so I think, yes, I think we'll speak more in detail about the actual growth, I think, closer to the end of the year. But overall, I think, yes, the impact will be minimal.
9. PAT growth of 109% & Revenue growth of 65% in H1-24 at a PE of 12
10. So Wait and Watch
If I hold the stock then one may continue holding on to NATCOPHARM.
Based on H1-24 performance, NATCOPHARM looks on track to deliver the strongest yearly performance since FY18
The past record during FY18-22 is very weak. Hence one needs to watch and decide on NATCOPHARM at a quarter to quarter level. One doesn’t want to get stuck with a stock where the business is not showing a clear growth trajectory. The management indicating Q3-24 to be weak with Q4-24 coming in strong needs to be watched closely.
US FDA issued 8 observations for NATCOPHARM Kothur facility is a cause of concern and to be watch closely, though management is quite confident of handling it as they have a back up facility in place for all its top revenue products
In terms of impact, I think the impact will be minimal because I think the company has always done this mitigation with their top products. As you're aware, I think all our top revenue items, our top five, six revenue items have an approval from our Vizag side in addition to the Hyderabad Kothur side. Lelanomide also, which is the biggest revenue item, is also having approval from both Vizag and Hyderabad. Except for two strengths, which are 2.5 mg and 20 mg, which is about 7% of the total lelanomide. So even that also we have done the batches. It's on stability, started stability. So we believe if you do 90 days stability and it's a procedure called CB30. If that is also done, then even that can be moved.
Overall, I think our impact will be minimal. So I think let's wait for the classification of the inspection and we'll make a decision. But as we plan every project, I think we always have a two-side strategy for all our top five.
11. Or, join the ride
If I am looking to enter the stock then
NATCOPHARM has delivered PAT growth of 109% & Revenue growth of 65% in H1-24 at a PE of 12 which makes valuations quite attractive.
NATCOPHARM delivered Rs 484 cr of free cash flow against a market cap of Rs 13,862 cr. As of H1-24 end it is available on a free cash flow yield of 3.5% (not annualized) which makes the valuations quite attractive.
The potential for 12 PE moving to a a mid teen PE is easily possible if NATCOPHARM is able to deliver growth as per FY24 PAT guidance and follow it up with growth in FY25 and FY26 . The potential of a PE re-rating could provide multi-bagger upside in the stock over the medium term.
Weakness in Q3-24 results could create more attractive entry points
USFDA is a clear risk even though management is saying that impact will be limited.
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Disclaimer
It is an analysis of the company data and not a stock recommendation
My analysis can be completely wrong and can change the next minute based on changes in my understanding of the company
I look to own good companies at prices where there is a path to market beating returns over decades