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Brokerage firm Nirmal Bang Equities has upgraded the stock of Natco Pharma to a 'buy' with a target price of ₹822.

"We have tweaked our future earnings estimates and lower our estimates for agrochemicals and domestic branded formulations business. We upgrade our rating to buy with a target price of ₹822, valuing it at 10 times March 2024E earnings per share (EPS) post the recent correction," said the brokerage firm.

The brokerage firm highlighted that Natco Pharma’s Q4FY22 revenue at ₹596.9 crore was significantly higher than its expectation of ₹450.4 crore. The revenue beat came on the back of profit share booking from Revlimid sales in the US in Q4FY22 and gain in market share for generic Revlimid in Canada.

Export formulations sales in Q4FY22 stood at ₹465 crore which grew by 192 percent year-on-year (YoY). The incremental growth in export formulations may be attributable to profit share from Revlimid in the US, market share gains from gRevlimid in Canada and gAfinitor in the US, Nirmal Bang said.

Despite the strong beat in revenue, the company reported a net loss of ₹50 crore, which is attributable to inventory write-off and credit loss provision pertaining to Covid-19 products. Inventory value write-off for FY22 was ₹232 crore and a provision of ₹46 crore was done towards bad debts, the brokerage firm highlighted.

Natco has partnered with Teva for the gRevlimid launch and earns a profit share (30 percent). We are building in an average 5 percent market share for Natco in FY23 and assume 20 percent price erosion, which should translate into nearly $70mn profit share in FY23, Nirmal Bang said.

In the next two-three years, Natco should be able to generate significant cash flow from the Revlimid opportunity. Natco’s utilisation of these cash reserves would be a key monitorable and would shape investor sentiments on the stock. The expectation would be to put the cash to use to strengthen the domestic branded formulations business of agrochemicals business. Natco has been struggling to build its domestic formulation business, said the brokerage.

"In Q4FY22, the company’s domestic brand sales declined by 7 percent YoY and 24 percent QoQ. The agrochemicals business clocked sales of ₹60 lakh, which is currently immaterial to the company. We have tweaked our future earnings estimates and lowered our estimates for agrochemicals and domestic branded formulations business," said Nirmal Bang.

Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.

Nirmal Bang upgrades Natco Pharma to a buy; here's why

The brokerage firm highlighted that Natco Pharma’s Q4FY22 revenue at ₹596.9 crore was significantly higher than its expectation of ₹450.4 crore.

<ul><li>The brokerage firm highlighted that Natco Pharma’s Q4FY22 revenue at ₹596.9 crore was significantly higher than its expectation of ₹450.4 crore.</li></ul>

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