Natco Pharma has surprised the market with yo-y revenue and net profit growth of 65% and 70% respectively in the second quarter of 2020-21. Pandemic related demand jump in its key product Tamiflu and Revlimid settlement have boosted the second quarter numbers. This ‘above average growth’ should not be taken as the norm. However, analysts believe that this research and development focused mid-size pharma company will repeat good performance in the coming quarter as well, mainly because normalisation of sales in other segments would balance moderation of growth from Covid related segments. Its third quarter revenues are expected to grow 18% yo-y, primarily driven by exports. Due to improvement in earnings before interest, tax, depreciation and amortisation (Ebitda) margin triggered by the increased share from the US markets, Natco is also expected to report 37% y-o-y net profit growth in the third quarter.Domestic business de-grew by 11% y-o-y in the second quarter on account of lower oncology and hepatitis-C sales. Impact was severe in the oncology segment as cancer patients were deferring hospitalised treatments due to Covid fears. With a basket of more than 30 products, Natco is a leading oncology player in India. Since the pandemic induced fear have receded, sales from other divisions should also normalise in the coming quarters.Natco has generated a niche market for itself in the US with the help of its focus on high end limited entry products and selective tie ups. It also has a strong pipeline there and has filed more than 55 ANDA applications. Most of these are for niche products. Its US business now is focused in areas like cancer, anti-viral, immune-suppression, etc and expect to come out with 1-2 complex product launches soon. To increase its reach, Natco also plans to market products of established players in the generic space through tie-ups.The recent diversification of its export to markets like Brazil, Canada, China, etc, are also doing well. Strong pandemic related sales happened in Brazil and Canada in the second quarter. Though the rate of growth will be moderate, pandemic related revenues will remain strong. Because there is no significant improvement in the number of Covid cases in countries like the US, Brazil, Canada, etc and therefore, pandemic related drugs such as Tamiflu should continue to attract good revenues in future also.After the recent jump up, its valuations are on the higher side compared to historical averages. However, its valuation is not high compared to other mid cap pharma companies. 80421670 Selection methodology: We pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.
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