Natco Pharma Shares Plunge 18.5% as Q3 Profit Drops 38%

Shares of Natco Pharma took a severe hit on February 13, dropping as much as 18.5% as investors reacted negatively to its disappointing Q3 earnings.

The stock continued its downward trend, extending its losses for the fifth consecutive session and losing one-fourth of its value within this period.

Q3 Earnings Report: A Disappointing Performance

Natco Pharma reported a net profit decline of 38% year-on-year, falling to Rs 132.4 crore in Q3 from Rs 212.7 crore in the same quarter last year.

Revenue also suffered a sharp drop of over 37%, declining to Rs 474.8 crore from Rs 758.6 crore in the year-ago period.

The company’s operational performance weakened significantly, with the EBITDA margin plunging by 2,717 basis points to 8.2% in Q3, compared to 35.3% in the previous year.

Declining Formulation Exports and Domestic Sales Impact Earnings

A major contributor to the weak earnings was the substantial decline in formulation exports, which plummeted by more than half to Rs 285.8 crore in Q3 from Rs 605.6 crore in the same period last year.

Domestic formulation sales also fell slightly to Rs 96.1 crore from Rs 99.4 crore. Export formulations contributed 44% to total revenue in Q3, while domestic formulations made up 15% of total sales.

For the fiscal year FY24, export formulations accounted for 76% of total sales, whereas domestic formulations contributed only 9%. The sharp decline in the export segment had a significant impact on the company’s earnings.

Market Reaction and Trading Volumes

At 09:55 AM, Natco Pharma’s stock was trading at Rs 1,012.50 on the NSE. The stock opened 14.6% lower at Rs 1,039.1 and further declined to an intraday low of Rs 992.15 per share.

By 10:05 AM, it was down 17.62%, trading at Rs 1,004 per share. Over the last six months, the stock has fallen by 31.87%.

A significant surge in trading volume was observed, further intensifying the stock’s decline. Around 24 lakh shares changed hands, nearly five times the one-month daily traded average of five lakh shares.

Financial Performance Metrics

• Net Profit: Rs 132.4 crore, down 38% YoY
• Revenue: Rs 474.8 crore, down 37% YoY
• EBITDA: Rs 215.1 crore, down 29.4% YoY
• EBITDA Margin: Declined to 33% from 38.3%
• PAT Margin: Declined to 20.3% from 26.7%

Stock Performance and Technical Indicators

Shares of Natco Pharma hit a low of Rs 975 on the BSE, registering a 19.86% decline.

The stock witnessed high trading volumes on the BSE, with around 2.77 lakh shares changing hands, significantly higher than the two-week average of 28,000 shares.

The turnover for the stock stood at Rs 27.86 crore, with a market capitalization of Rs 17,717.55 crore.

Technically, the stock traded below key moving averages, including the 5-day, 10-day, 20-day, 30-day, 50-day, 100-day, 150-day, and 200-day simple moving averages (SMAs).

The 14-day relative strength index (RSI) was at 28.59, indicating that the stock was in the oversold territory.

Company Overview and Business Segments

Natco Pharma operates in two main business segments: Pharmaceuticals and Agrochemicals. The pharmaceutical segment constitutes the majority of its revenues, with export formulations playing a crucial role, followed by Active Pharmaceutical Ingredients (API).

The company’s export formulations business focuses on high-entry-barrier and complex products, catering to markets in the US, Canada, Brazil, and the Asia-Pacific region.

In India, the company primarily deals in oncology products. In the US, Natco follows a partnership model for launching high-risk products and has also acquired Dash Pharma for front-end operations.

Natco Pharma owns six finished dosage formulation (FDF) manufacturing facilities, two API units, and two crop health science units.

Its key revenue-generating products in the US include gRevlimid, gCopaxone, gFosrenol, gTykerb, gTamiflu, gDoxil, gAfinitor, and gZortress.

Risks and Challenges Ahead

A significant portion of Natco Pharma’s revenue comes from the US market, making it susceptible to regulatory changes and market fluctuations.

As an export-driven company, it also faces risks related to exchange rate volatility.

The generic pharmaceutical industry remains highly competitive, which puts pressure on pricing and margins. Moreover, stringent and evolving regulations in key markets could impact operations.

Government policies aimed at reducing drug prices may also affect profitability, as highlighted in the company’s FY24 annual report.

Future Outlook and Concerns

Natco Pharma faces product concentration risk, with a significant portion of its revenue stemming from gRevlimid in the US.

However, once the patent for gRevlimid expires in FY26, the company’s revenue and margins are expected to decline substantially.

ICRA, in its rating rationale from April 2024, pointed out that this could be a major challenge for the company’s financial stability.

Despite short-term challenges, industry experts suggest that investors should assess the stock from a long-term perspective.

“For Natco Pharma, one should see the stock more from a long-term point of view. Investors need to have patience and guts of steel to hold on to this stock, especially in the kind of tumultuous markets that we have witnessed,” said Vinit Bolinjkar, Head of Research at Ventura Securities.