The Edelweiss report shared on the natco thread by Tarun is a must read to understand the pipeline of natco. I will try to give my observations on the company as I have been holding it for the last few years, and also highlight some monitorables.
Edelweiss _ US filings review _ 14.01.20.pdf (2.6 MB)
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Revlimid opportunity maynot turn out to be very bullish given the long list of Para IV filers (Dr Reddy’s, Cipla, Sun Pharma, Hetero, Apotex, ANDA Inc, Lotus Pharma, Natco, Zydus Cadila, Mylan, Aurobindo, Lupin) and the current list of settlements (Natco, Lotus pharma, Reddy, Cipla). Also, the only company which has an approved ANDA for revlimid is Lotus pharma, Natco’s approval date keeps on getting extended (was expected in late 2018, then revised to Q4FY20 then to Q2FY21 then to December 2020, lets see when approval comes).
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About capital allocation, QIP was done in 2017 at 915/share for 1 cr. shares (~915 cr.) and buyback was done in 2019 at 747.82/share for 30 lakh shares (~224 cr. excluding transaction costs). The QIP was much bigger than the buyback, also buyback quantum was much smaller compared to QIP size. The good thing about buyback was that it was done via the open market route, so they were able to buy shares at 550 levels bringing average price down to ~750.
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Below are the dividends from 2010, company has maintained 15-20% payout as dividend (which is in-line with other Indian growing companies). There is not out of the ordinary in terms of capital returns (by dividends + buybacks) to shareholders
| Year | Dividends |
|---|---|
| 2010 | 0.4 |
| 2011 | 0.4 |
| 2012 | 0.6 |
| 2013 | 0.8 |
| 2014 | 1 |
| 2015 | 1 |
| 2016 | 2 |
| 2017 | 7.25 |
| 2018 | 8.5 |
| 2019 | 7 |
| 2020 | 8.75 |
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Management guided doubling of Indian business in FY17 by FY20 which they failed to meet because their bet on Hep-C business didn’t pay off due to pricing controls enforced by government + non-repetitive nature of Hep-C business. Here we see how concentration on a few products/therapies can also lead to higher risk and not always higher returns.
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Their cash conversion recently has been slightly inferior. Over the last five years, their cumulative CFOs are 2008 cr. vs cumulative PAT of 2444 cr. (reflecting ~84% conversion) and cumulative EBITDA of 3255 cr. (~62%; should be closer to 75% assuming 25% taxes for NATCO).
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Another monitorable is the large CWIP of >400 cr. sitting on the balance sheet for more than 3 years now, although this number has started coming down recently from >600 cr. to ~450 cr. in Q2FY21.
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Natco’s base US business sucks. Money is mostly made through profit sharing (link to a valuepickr post computing this)
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Natco has been regularly investing in OMRV hospitals (PACE hospital) which is a specialty liver and kidney hospital in Hyderabad. Quantum of investments have been low so far (7.5 cr. in 2017; 5 cr. in 2019); Their current holding is 12.8% and the hospital’s FY18 revenue was 25cr. This is a kind of investment which doesn’t fit in with the basic business of natco.
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Management is very clear in conference calls. They were the first to point out the commoditisation of US generic market, they were the first to talk about opportunities in Chinese pharma market and later also said that China may not be the big opportunity that they had thought, etc. They are good communicators and seem to have a decent plan.