Natco Pharma Stock Research Report

Strong quarter, pipeline build-up underway…..

Natco’s Q2FY25 result was strong driven by gRevlimid. Cashflow generated from gRevlimid windfall is being used to develop NCEs, oligonucleotides and other complex products. Natco has a sole FTF on Ozempic (8mg/3ml and 2 mg/3ml) and Wegovy for US markets. It may acquire an asset worth up to USD 300mn to fill in the gap created by loss of exclusivity in gRevlimid in FY27. Its crop science biz is incurring EBITDA loss of INR 400-500mn p.a and will breakeven by Mar’26. Management maintains 20% profit growth guidance for FY25. Net cash balance of ~INR 26bn has been earmarked for R&D (8–10% of sales), M&A and dividends. Raise FY25–26E EPS by 12–14% to factor in better sales of gRevlimid. Maintain HOLD with TP of INR 1,430 on 20x FY26E EPS of base biz and NPV of INR 250 for limited competition opportunities in US.

Traction in exports boosts growth and margins

Q2FY25 revenue grew strong 32.9% YoY (+0.6% QoQ) to INR 13.7bn (I-SecINR 13.7bn) led by sustained momentum in exports business. Gross margin expanded 797bps YoY (+27bps QoQ) to 87.0% due to profit share of gRevlimid. EBITDA grew 75.6% YoY to INR 8.0bn (I-Sec – INR 5.9bn) while margin expanded 1426bps YoY (-40bps QoQ) to 58.7%. PAT rose 83.3% YoY (+1.2 QoQ) to INR 6.8bn (I-Sec – INR 4.8bn) boosted by higher other income (+117.0% YoY).

Slowdown in base biz; gRevlimid sales to inch up in FY26E

Domestic formulations revenue declined 0.2% YoY (+0.1% QoQ) to INR 1bn. On a low base, we expect domestic business to grow 8.7% over FY24–26E driven by improved momentum in oncology and new product launches (including Semaglutide in FY26). Export revenue (including profit share and subsidiaries) was up 52.9% YoY (0.1% QoQ) to INR 12.1bn driven by higher sales and profit share of gRevlimid. Management anticipates a QoQ dip in gRevlimid sales in Q3FY25 and supplies will resume from Q4FY25. We expect exports to grow at 22.0% CAGR over FY24–26E. Crop sciences business revenue declined 72.8% YoY to INR 141mn in Q2FY25. The business is likely to stabilise in next 2–3 years with revenue of INR 3bn. API business declined 36.2% YoY (+26.5% QoQ) to INR 496mn impacted by higher captive consumption. The company has 10 niche molecules, including NCEs, oligonucleotides and other complex products in development pipeline.

Valuation and risks 

Higher sales and profit share of gRevlimid led to 52.9% surge in Natco’s export business in Q2FY25. Contribution from gRevlimid may taper down in Q3FY25; however, the company is on track to meet its revenue target for FY25. Going ahead, management expects significant improvement in its market share in gRevlimid, which it expects to touch ~33% in Jan’26. Natco has settled Ozempic with Novo Nordisk. It has sole FTF for 8mg/3ml and 2 mg/3ml and shared exclusivity for two strengths. Pipeline also consists of FTF opportunities like Olaparib (partnered with Alembic), Ibrutinib, Capmatinib, Bosentan and Carfilzomi which should drive growth in medium term. The company also aims to file 2–3 limited competition products in the US every year. India growth is expected to stabilise at 8–10%. It has 3-4 launches lined up including Semaglutide in FY26. Besides, the company has cash balance of INR 26bn, which it may use to grow inorganically and for R&D.

We raise our revenue estimates by ~4% and EPS estimates by ~12%/14% forFY25/26E, factoring in higher contribution from gRevlimid. The stock currently trades at valuations of 11.8x FY25E and 9.5x FY26E earnings, and EV/EBITDA multiple of 9.0x FY25E and 6.9x FY26E. We maintain our HOLD rating with an unchanged SoTP-based target price of INR 1,430, including NPV of INR 250/share for exclusive products.

Key upside risks: Faster rise in market share in gRevlimid, and healthy growth in domestic business.

Key downside risks: Delay in US launches, and increased competition in gCopaxone and gRevlimid.