Natco Pharma recently announced a buyback of Rs210 crores through open market route at a maximum price of Rs700.
This buyback is not surprising considering the past-history of Natco wherein the company has always leveraged capital markets to its benefit.
If one looks at the capital history of Natco over last 10 years, the company has raised fresh capital four times and each time the capital raise was at opportunistic time when the stock was at new highs. Similarly, when the stock has been stagnant and trending lower over the last few years, the company is buying back stock at lower levels.
And this intention to buyback is supported by a very strong balance sheet that Natco has always maintained. Natco over last many years have maintained a strong liquidity of ~Rs1000 crores on its balancesheet.
So, a combination of management intent & balance sheet strength provides reasonable comfort that there would be price support at lower price levels.
But the bigger question is where is the upside?
Well, 2022 was the 1st year of Natco capitalizing on its long awaited blockbuster drug-Revlimid’s generic opportunity. And it has allowed Natco to generate some decent profits in 2022.
Following is a snippet from our research report on Natco Pharma wherein we had tried to figure out what kind of profits Natco could generate in its 1st year of Revlimid opportunity-
Last three quarters have played out exactly how we expected; Natco in 2022 (ex-Q4FY22 write-offs) has generated a net profit of Rs610 crores.
However, market has not rewarded Natco for the same. Market is still working with an assumption that Revlimid is a one-off opportunity and that Natco will not be able to generate recurring profits out of it. Same thing has happened with the CTPR opportunity, wherein even after getting a favorable outcome on the patent case, market has not discounted the same.
Next two quarters are extremely important for Natco as it will provide markets more visibility on the sustainability of Revlimid business and the opportunity of CTPR business.
Our thought is that not only will Revlimid’s profits be sustainable, but they will grow over the years. This is because of the kind of volume restricted market formation that this product has and Natco’s positioning in it wherein its volumes for the product will expand by 4-6x over 2022 base in next 3-years.
You can read our research report to understand Revlimid’s market formation & Natco’s positioning; along with other optionalities that Natco has-
A closing thought that I would share here is that in non-linear bets like Natco, risk management is very important given that the entire upside is dependent on 1-2 products. Any negative development and entire thesis can go for a toss.
Also, always remember that the market is supreme. There needs to be a limit on how much & for how long one is ready to take a different opinion than what the market is reflecting.
If markets do not reward Natco’s next two quarters performance, then probably it never will.
That’s it for this week, new insight coming up next week. So stayed tuned!
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