Buy Natco Pharma; target of Rs 1150: Axis Direct

Axis Direct's research report on Natco Pharma

Though Q2 revenue declined 9% YoY (on a high base), EBITDA and PAT grew 16% and 27% led by higher-margin limited-competition product gDoxil in US. We expect strong PAT growth of 113% in H2 driven by gCopaxone, gDoxil, gTamiflu OS^. Expect strong FCF of Rs 4.4 bn in FY18 and Rs 6.1 bn in FY19. We raise FY18E EPS by 36% to factor in an additional quarter sales of gCopaxone 40 mg (previously built in Q4’18 launch). Revise SOTP to Rs 1,150 as we roll forward to 20x Sep’19E EPS + Rs 124 for R&D pipeline (vs. SOTP of Rs 1,240 @ 20x FY19E EPS +Rs 117 for R&D pipeline, earlier). Maintain BUY. Outlook
While Natco’s large fundraise (Rs 15 bn) announcement comes as a surprise to us, we believe, this will help accelerate its complex generics pipeline (with focus on chemistry, peptides & injectables) and expand its India and RoW market footprint, given its strong execution track record. At CMP, the stock trades at 17x FY18E EPS of Rs 55.5 and 17.2x FY19E EPS of Rs 55.4.  Maintain BUY with SOTP of Rs 1,150

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