Natco Pharma (NATPHA)

(1)

August 16, 2012

Result Update

WHAT’S CHANGED…

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 20.6% (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, 2015.

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$800 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%,

20% and 30%, respectively, in FY12-14E. We have valued the base

business at | 325 i.e. 10x 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 140.8 164.3 117.8 153.8 19.6 -8.5

EBITDA 29.0 34.5 26.1 25.8 11.1 12.2

Natco Pharma (NATPHA)

| 361

Rating matrix

Rating : Hold

Target : | 378

Target Period : 12 months Potential Upside : 5%

Key Financials

(| crore) FY11 FY12 FY13E FY14E

Revenues 444.9 518.5 635.0 727.5

EBITDA 86.8 115.5 140.7 166.6

Net Profit 53.5 59.7 79.7 101.2

Valuation summary

FY11 FY12 FY13E FY14E

EPS (|) 17.2 19.2 25.6 32.5 PE (x) 17.9 16.1 12.0 9.5 Target PE(x) 18.9 17.0 12.7 10.0 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 14.0 15.7 17.1 Stock data Market Capitalisation Debt (FY12) Cash (FY12) EV 52 week H/L 437/197

Equity capital | 31.1 crore

Face value | 10 MF Holding (%) 11.5 FII Holding (%) 5.9 | 1125 crore | 240 crore | 33 crore | 1332 crore Price movement 150 200 250 300 350 400 450 Aug-12 May-12 Feb-12 Nov-11 Aug-11 4,000 4,300 4,600 4,900 5,200 5,500 5,800 6,100 6,400 Price (R.H.S) Nifty (L.H.S) Analyst’s name Siddhant Khandekar [email protected]

(2)

Quarterly Highlights

Exhibit 2: Trends in revenues & EBITDA

123 145.4 154.6 _140.8 26.1 30.1 34.1 25.8 29.0 133 0 40 80 120 160 200

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

| crore

Revenues EBITDA

[

Source: Company, ICICIdirect.com Research

Exhibit 3: Trends in EBITDA margin & net profit margin

21.2 22.6 23.5 16.7 20.6 11.4 12.0 13.7 8.2 12.1 0 5 10 15 20 25

%

EBITDA Margins Net Profit Margins

[

Exhibit 4: Net profit grows 21% YoY

14 19.9 12.65 17.1 15.9 10 15 20

Revenues grew ~19.6% YoY to | 140.8 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

EBITDA margins declined 168 bps to 20.6% due to higher employee cost and power cost. EBITDA grew 11% to | 29 crore

(3)

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 35.0 40.3 -13 34.2 3 Domestic - Oncology 42.6 24.7 72 41.9 2 Exports 16.0 14.9 8 24.0 -33 US Retail 24.0 19.9 21 21.0 14

Domestic Non-Onco & other formulations 16.8 16.3 3 20.6 -19

Total Formulations 99.4 75.8 31 107.5 -8

Exhibit 6: Trends in oncology business

24.7 41.2 40.6 41.9 42.6 0 5 10 15 20 25 30 35 40 45

( | crore)

Oncology

[

Exhibit 7: API business up 8% YoY

40.3 36.7 36.9 _34.2 _35.0 0 10 20 30 40 50

| crore

API Source: Company, ICICIdirect.com Research

Exhibit 8: US retail business grows 10% YoY

19.9 _19.3 21.9 21.0 24.0 0 10 20 30

| crore

US Retail Source: Company, ICICIdirect.com Research The company launched one oncology drug Dasanat and

Decita tablets during the quarter, which also led growth in the oncology business

(4)

Exhibit 9: Assumptions

(| crore) FY11 FY12 FY13E FY14E

API Domestic 22.9 31.0 38.0 41.0 YoY Growth (%) 68.8 35.2 22.7 8.0 Exports 83.4 117.0 126.7 145.7 YoY Growth (%) 10.7 40.3 8.3 15.0 Total API 106.3 148.0 164.7 186.7 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 27.0 15.0 Exports 50.5 65.6 107.7 132.6 YoY Growth (%) 113.0 29.9 64.2 23.1 US Retail 111.5 82.1 87.4 87.4 YoY Growth (%) -22.0 -26.4 6.6 0.0

Other formulation revenues 60.0 74.4 86.6 103.9

YoY Growth (%) -2.2 24.1 16.3 20.0

Total Formulation 343.1 370.5 470.3 540.8

YoY Growth (%) -2.3 8.0 26.9 15.0

Total consolidated sales 449.4 518.4 635.0 727.5

Valuation

We expect revenues, EBITDA and net profit to grow at a CAGR of 18%,

20% and 30%, respectively, in FY12-14E. We have valued the base

business at | 325 i.e. 10x 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 10: Valuation table

| share

Base Business (10x 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

[

(5)

Exhibit 11: One year forward P/E 0 50 100 150 200 250 300 350 400 450

Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12

(|)

Price 15.0x 13.2x 12.3x 10.5x 6.0x

Exhibit 12: One year forward PE of company vs. BSE Healthcare Index

0 5 10 15 20 25 30 35

Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12

x

Natco Pharma BSE Healthcare Index

15% Discount

(6)

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 (%) -0.2 21.9 18.7 14.9

Raw Material Expenses 177.8 202.9 236.2 272.7

Employee Expenses 64.3 77.8 91.4 98.5

Other expenses 127.0 159.4 191.0 219.7

Total Operating Expenditure 369.1 440.1 518.6 590.8

EBITDA 86.8 115.5 140.7 166.6 Growth(%) -6.6 33.1 21.8 18.4 Depreciation 15.9 15.8 23.0 26.9 Interest 14.2 23.6 20.0 18.7 Other Income 8.4 3.5 4.8 8.0 PBT 65.1 79.6 102.4 129.1 Taxation 13.2 21.1 22.7 27.3 PAT before MI 51.9 58.5 79.7 101.8 Minority Interest -1.6 -1.1 0.1 0.5

Less: Prior Period Items 0.0 0.0 0.0 0.0

PAT 53.5 59.7 79.7 101.2

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 79.7 101.2

Add: Depreciation 15.9 15.8 23.0 26.9

(Inc)/dec in Current Assets -61.7 -43.7 -35.2 -35.0 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 -2.0 0 0 0

(Purchase)/Sale of Fixed Assets -83.3 -139.0 -80.0 -60.0 Deferred Tax Liability -1.7 3.7 4.0 4.0

Minority Interest -3.9 -0.2 0.1 0.5

CF from investing activities -91.0 -135.5 -75.9 -55.5 Inc / (Dec) in Equity Capital 0.0 3.0 0.0 0.0 Inc / (Dec) in Sec Loan Funds 105.5 20.0 -30.0 -20.0 Inc / (Dec) in Unsec. Loan Funds -5.1 0.0 0.0 0.0 Dividend & Dividend tax -6.6 -10.9 -12.8 -14.6 Inc/(dec) in Sec Pre Account 0.0 66.0 0.0 0.0 CF from financing activities 93.7 79.9 -42.8 -34.6

Net Cash flow 25.2 -0.6 -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 324.3 440.9 507.8 594.4 Total Shareholders funds 352.4 472.0 538.9 625.6

Total Debt 220.0 240.0 210.0 190.0

Deferred Tax Liability 25.1 28.8 32.8 36.8 Minority Interest / Others 1.1 0.9 1.0 1.5 Total Liabilities 598.5 741.7 782.6 853.8 Assets

Gross Block 354.0 473.7 592.7 652.7

Less: Acc Depreciation 100.7 114.7 134.9 158.6

Net Block 253.3 359.0 457.7 494.1

Capital WIP 98.7 79.0 30.0 20.0

Total Fixed Assets 352.0 438.0 487.7 514.1

Net Intangibles 16.9 54.1 61.3 68.1

Investments 62.6 62.6 62.6 62.6

Inventory 102.2 110.5 133.0 146.0

Debtors 71.0 94.5 104.4 119.6

Loans and Advances 69.2 81.2 83.9 90.7

Cash 33.3 32.7 26.4 32.7

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 33.0 41.1

BV 113.1 151.5 173.0 200.8

DPS 2.0 3.0 3.5 4.0

Cash Per Share 10.7 10.5 8.5 10.5

Operating Ratios (%)

EBITDA Margin 19.0 20.8 21.3 22.0

PBT / Total Operating income 14.6 15.4 16.1 17.7

PAT Margin 11.7 10.7 12.1 13.4 Inventory days 73.7 74.9 70.0 70.0 Debtor days 58.2 66.5 60.0 60.0 Creditor days 80.9 84.5 90.0 80.0 Return Ratios (%) RoE 15.2 12.6 14.8 16.2 RoCE 12.4 14.0 15.7 17.1 RoIC 10.0 10.3 12.1 13.4 Valuation Ratios (x) P/E 17.9 16.1 12.0 9.5 EV / EBITDA 15.1 11.5 9.3 7.7

(7)

Exhibit 13: Recommendation History 150 200 250 300 350 400 450 Aug-12 Jun-12 May-12 Apr-12 Feb-12 Jan-12 Nov-11 Oct-11 Aug-11

Price Target Price Source: Company, ICICIdirect.com Research

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 390 378 HOLD

5-Jul-12 Q1FY13 Preview 347 378 HOLD

ICICIdirect.com coverage universe (Healthcare)

I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E Apollo Hospitals APOHOS 611 715 BUY 8,540 16.3 21.9 27.4 37.4 27.9 22.3 17.8 14.4 11.9 11.7 13.6 15.0 8.8 10.4 11.8 Aurobindo Pharma AURPHA 104 110 HOLD 3,045 -4.2 15.0 19.4 -24.5 6.9 5.4 9.9 6.4 5.0 7.6 11.5 14.0 -5.3 16.0 17.6 Biocon BIOCON 241 313 BUY 4,840 16.9 18.5 22.4 14.2 13.0 10.8 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 52.0 27.3 22.5 16.7 19.0 14.0 10.8 21.7 24.2 29.1 28.7 28.8 31.4 Divi's Laboratories DIVLAB 1142 1066 HOLD 15,223 41.1 50.5 59.2 27.8 22.6 19.3 21.3 16.8 13.3 28.4 29.5 30.5 25.1 25.7 25.1 Elder Pharma ELDPHA 278 342 BUY 573 38.0 41.1 61.4 7.3 6.8 4.5 7.0 5.8 4.5 10.1 11.8 13.9 10.8 10.5 14.1 Fortis Healthcare FORHEA 101 97 HOLD 4,124 1.8 -5.0 2.0 342.6 NA 308.3 25.6 13.5 11.2 2.1 5.0 6.0 2.2 -6.7 2.6 Glenmark Pharma GLEPHA 415 432 HOLD 11,283 17.0 18.8 27.0 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 60 63 BUY 554 5.0 7.1 9.0 11.9 8.4 6.6 8.5 6.0 5.1 11.0 14.2 14.5 12.0 14.8 16.2 Ipca Laboratories IPCLAB 410 476 BUY 5,198 22.0 27.7 39.7 18.7 14.8 10.3 11.3 9.0 7.3 23.5 26.6 28.3 22.1 22.6 25.4 Jubilant Life Sciences VAMORG 163 209 BUY 2,607 0.6 20.3 32.3 264.6 8.0 5.0 7.0 5.8 4.9 10.7 12.8 14.1 0.4 12.5 17.0 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 21.0 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 12.0 9.5 11.6 9.3 7.7 14.0 15.7 17.1 12.6 14.8 16.2 Opto Circuits OPTCIR 148 256 BUY 3,600 23.6 22.9 28.5 6.3 6.5 5.2 7.3 6.2 5.1 19.8 20.2 21.6 33.4 26.0 26.2 Strides Arcolab STRARC 780 700 HOLD 4,585 38.5 49.4 58.4 20.3 15.8 13.4 13.3 10.2 8.6 10.4 12.5 14.1 16.4 44.4 14.8 Sun Pharma SUNPHA 667 651 HOLD 69,429 25.0 24.8 27.2 26.7 26.9 24.6 20.4 19.2 17.1 29.2 27.7 25.3 21.3 19.3 18.2 Torrent Pharma TORPHA 683 746 BUY 5,810 33.6 47.2 53.3 20.4 14.5 12.8 11.4 9.3 7.7 24.9 27.6 27.9 25.8 30.0 27.3 Unichem Laboratories UNILAB 167 171 HOLD 1,515 7.9 13.8 17.1 21.1 12.0 9.8 13.3 8.3 6.5 11.6 17.7 20.2 10.3 16.0 17.2

RoNW (%) Company

(8)

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey

Head – Research

[email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1

st

_{Floor, Akruti Trade Centre,}

Road No. 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

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. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:

ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate