Hi Madhavojha,
Thanks for your post, Can you please help in understanding the numbers for 55 P/E and PAT assumption of around 300 Cr post revlimid.
25% of FY25 profit is 470 Cr (assumption of 25% EBIDTA/ profits are from Non-revlimid businesses) valuing company at 33-35 P/E post revlimid.
Disclosure: Invested and Biased.
Thanks for sharing your thoughts @madhavojha. Here is my analysis:
Revlimid sales will decline as patent expires at end of CY25 and so sales and PAT will decline in FYe26. Management has guided for PAT of ~1250 Cr in FYe26 on sales of ~3550 Cr. Revlimid sale price per unit and margins will decline much further for FYe27 as competition sets in and price erosion happens.
But there are five factors might help alleviate this decline:
(i) while margins decline, market share of Revlimid innovator Bristol Myers Squibb should go down as quotas are no longer applicable. This can lead to increased volume for generic players like NATCOPHARMA, thereby offsetting to some extent the decline in margins.
(ii) successful launch(es) of the many first to file approvals (sole and joint) that the company has, including Olaparib, might help offset this decline
(iii) successful launch of Semaglutide in India
(iv) Their agrochemicals business turns profitable,
(v) with cash reserves ~3500 Cr a good acquisition should be EPS accretive. The average return on equity (RoE) of Indian pharma companies is ~13% while FD rates are say 6%. In that case an average acquisition might boost PAT by 7% of 3500 Cr = 245 Cr which corresponds to EPS of ~13.
In any case there is likely to be very significant volatility/lumpiness in sales/profits as some drug in their current portfolio wanes and then it takes time for a new launch to gain traction. Over a longer period also there will be significant volatility/lumpiness in sales and/or profits as existing products face price erosion and new launches take time to ramp up. Overall, to me the three scenarios are:
(a) In the bear case scenario, none of the above 5 factors fire and EPS drops to 70 in FYe26 and 50 for FYe27.
(b) Baseline is EPS of 75 in FYe26 and further decline is arrested due to one/two upside factors playing out leading to EPS of 75 in FYe27.
(c) Bull case scenario would be that three/four of the above 5 factors play out favourably leading to EPS of 80 in FYe26 and rebounding to 105 in FYe27 (i.e. to FYe25 levels).
It seems to me that the management has a good reputation for integrity and that gives me much more comfort than the above scenario-based projections. Would be happy to hear other people’s thoughts and/or observations.
Disclosure: invested and possibly biased.
Thanks for sharing your analysis @sheekhuj. Below is my detailed investment thesis explaining why I decided to exit the stock and book a loss.
I have a few concerns regarding the sustainability of the outlook you’ve shared.
FY25 FINANCIAL METRICS
Revenue: ₹4,430 Cr
EBITDA: ₹2,196 Cr
Net Profit: ₹1,883 Cr
P/E Ratio: 8
Segmentation: Core vs. Windfall Earnings
Revlimid (Windfall):
Core Business:
Basic Valuation (SOPV):
Revlimid (5× P/E): ₹7,865 Cr (Windfall Earnings)
Core Business (20× P/E): ₹6,000 Cr
Implied Valuation: ₹775 per share
Future Outlook:
With the Revlimid patent set to expire in January 2026, the company’s high-margin (71%) earnings are expected to transition into a lower-margin (13%) core business. Most of the post-2026 operations will depend on this structurally weaker and cyclical segment.
Management has guided that future sales are expected to decline.
While any acquisition could potentially boost the top line, management has neither provided a concrete plan nor shown progress toward executing one.
If history repeats itself, Natco might take another 2–3 years to reach its all-time high again, as earnings return to normal after the one-time boost.
Two situation can make NATCO outperform in future:
Natco has earned around 3500 cr PAT (approx) from Revlimid . If this kind of one off boost does not improve stock performance, I am not sure what will.
I think market expects better performance from base business, but Natco has not shown improvements in their base business, in fact it has deteriorated in the last 4/5 years. Market give more valuation (e.f PE) to business which grows consistently over a period of time (like domestic focus pharma companies), and less to one off kind of income (like Revlimid). They have been talking of agro business improvement from few years now, but it is still not meaningful (talk continues…).
If the acquisition improves base business, market may like like it, but if they invest good portion of that in another one off kind if future payoff, then stock is unlikely to move upwards.
Note: Invested for last 5 year hoping that Revlimid may boot it. Revlimid came and going off, but natco price is where it was few year back. Existed most of the position.
It would be help if more information shared on SSGR. How to calculate it ? when to use it for effecient? when to not to use it?
A detailed post on SSGR by Respected Dr. Vijay Malik Sir.
it did bouned back. Semaglutide news and action is still awaiting. It would be very interesting to know more detailed roadmap on agro chemical and usage of cash on book.
