Result Update

November 12, 2012

Rating matrix
Rating Target Target Period Potential Upside : : : : Buy | 452 12 months 15%

Natco Pharma (NATPHA)

| 393
WHATS CHANGED
FY12 FY13E 660.5 155.5 88.5 FY14E 765.1 178.9 112.8

Key Financials
(| crore) Revenues EBITDA Net Profit FY11 444.9 86.8 53.5 506.8 105.7 59.6

PRICE TARGET ....................................................................... Changed from | 378 to | 452 EPS (FY13E) ......................................................................... Changed from | 25.6 to | 28.4 EPS (FY14E) ......................................................................... Changed from | 32.5 to | 36.2 RATING ....................................................................................... Changed from Hold to Buy

Valuation summary
FY11 EPS (|) PE (x) Target PE(x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) 17.2 19.8 23.2 16.3 3.5 15.2 12.3 FY12 19.1 17.8 20.8 13.7 2.6 12.7 12.3 FY13E 28.4 12.0 14.0 9.1 2.2 16.2 17.6 FY14E 36.2 9.4 11.0 7.7 1.9 17.5 18.1

Robust numbers outweigh Lansoprazole delay

Natco reported an exemplary set of numbers. Revenues grew 42% YoY to | 180 crore (I-direct estimate: | 148 crore) driven by a sharp rise in export APIs, which shot up ~97%. Over and above the improvement in consignments, some of the API exports from the previous quarter may have been recognised during the quarter. EBITDA margins remained flat YoY. EBITDA, in value terms, grew 43% to | 44 crore, far higher than Idirect estimate of | 30 crore on the back of an improved operating performance. The PAT grew 32% to | 21 crore (I-direct estimate: | 16 crore). Note that the robust operating performance was despite 1) subdued performance of domestic oncology formulations and 2) nonrecurring expenses of ~| 11-12 crore. We are upgrading the stock to BUY as we see improved visibility. Lansoprazole approval delayed further The much awaited USFDA approval for anti-ulcerant Lansoprazole seems to have got delayed further. The management has indicated satisfactory corroboration to the issues by the agency and expects the approval shortly. Post approval, Lansoprazole will be marketed by Actavis and Breckenridge in the US. It is currently a five player market. IPAB rejects Bayer plea on Nexavar, Natco can continue the marketing During the quarter, the Intellectual Property Appellate Board (IPAB) rejected a petition by Bayer seeking a stay on an order of the Controller of Patents, granting compulsory licence to Natco for cancer drug Nexavar. Note that in March the Controller of Patents granted the first ever compulsory licence to Natco to make sorofenib tosylate, a generic version of Bayers high-priced anti-cancer drug Nexavar. Blow-out quarter, re-rating on cards We expect revenues, EBITDA and net profit to grow at a CAGR of 23%, 30% and 38%, respectively, in FY12-14E. We now value the base business at | 399 i.e. 11x (10x earlier) FY14E EPS of | 36.2. Even though a marginal player, Natco remains a focused niche player in the oncology segment and the Nexavar victory will only strengthen its forte. Note that Nexavar still remains just a small part of the portfolio. Our SoTP based target price now stands at | 452 (| 399 for base business + | 53.3 for Para IV/FTF). We upgrade to BUY despite delay in Lansoprazole launch.
Exhibit 1: Financial Performance
(| Crore) Revenues EBITDA EBITDA Margin (%) Depreciation Interest Reported PAT EPS (|) Q2FY13A 180.3 43.5 24.1 5.1 5.8 21.0 6.7 Q2FY13E 148.0 30.3 20.5 4.8 5.4 16.1 5.2 Q2FY12 126.7 30.4 24.0 4.0 6.1 15.9 5.1 Q1FY13 140.8 29.0 20.6 4.4 4.7 17.1 5.5 26.9 -4.7 31.7 15.1 24.8 23.0 YoY Gr.(%) 42.4 43.2 QoQ Gr.(%) 28.0 50.2

Stock data
Market Capitalisation Debt (FY12) Cash (FY12) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) | 1224 crore | 221 crore | 37 crore | 1409 crore 437/195 | 31.1 crore | 10 10.6 7.5

Price movement
6,400 6,100 5,800 5,500 5,200 4,900 4,600 4,300 4,000 Nov-11 Feb-12 May-12 Aug-12 Nifty (L.H.S) Price (R.H.S) 450 400 350 300 250 200 150 Nov-12

Analysts name
Siddhant Khandekar siddhant.khandekar@icicisecurities.com Krishna Kiran Konduri krishna.konduri@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Quarterly Highlights
Exhibit 2: Trends in revenues & EBITDA
Revenues grew 42.4% YoY to | 180.3 crore,, far higher than our estimates of | 148 crore driven by strong growth in overall exports. After a subdued Q1FY13, | 29.8 crore while export API leapfrogged by 97% to | 55.3 crore. As the company maintained the policy of keeping hedges open, the favourable currency also supported the growth export formulations grew 233% YoY on a lower base to

200 160 | crore 120 80 40 0 Q2FY12 Q3FY12 Q4FY12 Revenues

[

180.3 133 145.4 154.6 140.8

30.1

34.1

25.8

29.0

43.5

Q1FY13 EBITDA

Q2FY13

Source: Company, ICICIdirect.com Research

Exhibit 3: Trends in EBITDA margin & net profit margin

30
Despite a favourable currency, EBITDA improved by just 10 bps to 24.1% on the back of higher employee cost. Employee cost during the quarter includes one-time charge of | 5.71 crore, as the company issued employee stock options to employees. Excluding this, margins stood at 27.3%. EBITDA, in absolute terms, increased by 43% to | 43.5 crore

25 20 15 10 5 0 %

22.6

23.5 20.6 16.7 13.7 8.2 12.1

24.1

12.0

11.6

Q2FY12

Q3FY12

Q4FY12

Q1FY13 Net Profit Margins

Q2FY13

EBITDA Margins
[

Source: Company, ICICIdirect.com Research

Exhibit 4: Net profit grows 32% YoY due to one -off | 6 crore

25
The company booked | 6.18 crore during the quarter on SMS Pharma. As per the order from High court of Andhra Pradesh, the company has deposited the same in the court. This one-time expense restricted growth in net profit to 31.7% to | 21 crore (even then higher than our estimates of | 16.1 crore)

20 | crore 15 10 5 0

19.9 15.9 12.65

21.0 17.1

account of litigation provision regarding the case with

Q2FY12

Q3FY12

Q4FY12 Net Profit

Q1FY13

Q2FY13

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Exhibit 5: Segment wise performance

Domestic Exports Total APIs Domestic - Oncology Exports US Retail Domestic Non-Onco & other formulations Total Formulations Q2FY13 8.2 55.3 63.6 35.5 29.8 23.2 17.0 105.5 Q2FY12 8.5 28.1 36.7 41.2 9.0 19.3 18.8 88.2 YoY Gr(%) -3 97 73 -14 233 20 -10 20 Q1FY13 QoQ Gr (%) 8.9 -7 26.2 111 35.0 81 42.6 -17 16.0 86 24.0 -4 16.8 2 99.4 6

Sales from the domestic oncology business declined 14% to | 35.5 crore due to lack of new product launches. The companys version of Nexavar has clocked sales of ~ | 6 crore during the quarter and | 12 crore for the first half

Source: Company, ICICIdirect.com Research

Exhibit 6: Trends in oncology business

45 40 35 30 25 20 15 10 5 0 41.2 40.6 41.9 42.6 35.5

( | crore)

The API business grew 73% to | 63.6 crore mainly on the back of robust growth of 97% in the export API business. After an 18% de-growth in API exports in Q1FY13, the company has posted strong growth

Q2FY12

Q3FY12

Q4FY12 Oncology

Q1FY13

Q2FY13

Source: Company, ICICIdirect.com Research

Exhibit 7: Exports API sales boost overall API business

80 60 | crore 40 20 0 Q2FY12 Q3FY12 Q4FY12 API Q1FY13 Q2FY13 34.2 35.0 63.6

Exhibit 8: US retail business grows 20% YoY

30 20 10 0 Q2FY12 Q3FY12 Q4FY12 US Retail Q1FY13 Q2FY13 19.3 21.9 21.0 24.0

23.2

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

IPAB rejects Bayer plea on Nexavar, Natco can continue the marketing During the quarter, the Intellectual Property Appellate Board (IPAB) rejected a petition by Bayer seeking a stay on an order of the Controller of Patents, granting compulsory licence to Natco for cancer drug Nexavar. Note that in March the Controller of Patents granted the first ever compulsory licence to Natco to make sorofenib tosylate, a generic version of Bayers high-priced anti-cancer drug Nexavar. Bayer obtained a patent in India in 2008 for Nexavar, which cost | 2.8 lakh for a pack of 120 tablets, equivalent to a months dosage. Natco was told to sell the pack at | 8,800. As per the licence conditions, Natco is supposed to pay a 6% royalty to Bayer from the sales of sorofenib tosylate.

ICICI Securities Ltd | Retail Equity Research

| crore

36.7

36.9

Page 3

Exhibit 9: Assumptions
(| crore) API Domestic YoY Growth (%) Exports YoY Growth (%) Total API YoY Growth (%) Formulation Oncology YoY Growth (%) Exports YoY Growth (%) US Retail YoY Growth (%) Other formulation revenues YoY Growth (%) Total Formulation YoY Growth (%) Total consolidated sales 121.2 -2.1 50.5 113.0 111.5 -22.0 60.0 -2.2 343.1 -2.3 449.4 148.4 22.5 65.6 29.9 82.1 -26.4 74.4 24.1 370.5 8.0 518.4 175.5 18.2 120.4 83.6 90.9 10.8 81.0 8.9 467.8 26.3 660.4 201.8 15.0 146.6 21.7 90.9 0.0 97.2 20.0 536.5 14.7 765.1 22.9 68.8 83.4 10.7 106.3 19.5 31.0 35.2 117.0 40.3 148.0 39.2 36.9 19.1 155.7 33.0 192.5 30.1 39.8 8.0 188.8 21.3 228.6 18.7 FY11 FY12 FY13E FY14E

Source: Company, ICICIdirect.com Research

Valuation
We expect revenues, EBITDA and net profit to grow at a CAGR of 23%, 30% and 38%, respectively, in FY12-14E. We now value the base business at | 399 i.e. 11x (10x earlier) FY14E EPS of | 36.2. Even though a marginal player, Natco remains a focused niche player in the oncology segment and the Nexavar victory will only strengthen its forte. Note that Nexavar still remains just a small part of the portfolio. Our SoTP based target price now stands at | 452 (| 399 for base business + | 53.3 for Para IV/ FTF). We upgrade the stock to BUY despite a delay in Lansoprazole launch.
Exhibit 10: Valuation table
Base Business (11x FY14E EPS of | 36.2) Para IV Opportunities Lenalidomide capsules Glatiramer Acetate Injection Lanthanum Carbonate chewable tablets Oseltamivir Phosphate Capsules Target Price
[

| share 399 28 18 4 3 452

Source: Company, ICICIdirect.com Research

Key risks- 1) Delay in product approvals from the USFDA and (2) intensifying price war in the domestic oncology market.

ICICI Securities Ltd | Retail Equity Research

Page 4

Exhibit 11: One year forward P/E

600 500 400 300 200 100 0 Nov-10 Oct-06 May-07 Aug-12 Dec-07 Apr-10 Sep-09 Mar-06 Jun-11 10.3x Jan-12 6.0x Mar-12 Jul-08 14.6x Feb-09 12.9x (|)

Price
[ [

12.1x

Source: Company, ICICIdirect.com Research

Exhibit 12: One year forward PE of company vs. BSE Healthcare Index
35 30 25 20 x 15 10 5 0 Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Natco Pharma Jul-09 Mar-10 Nov-10 BSE Healthcare Index Jul-11 35% Discount

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Financial summary
Profit and loss statement
(Year-end March) / (| crore) Total operating Income Growth (%) Raw Material Expenses Employee Expenses Other expenses Total Operating Expenditure EBITDA Growth(%) Depreciation Interest Other Income PBT Taxation PAT before MI Minority Interest Less: Prior Period Items PAT Growth(%) EPS(|) FY11 455.9 -0.2 177.8 64.3 127.0 369.1 86.8 -6.6 15.9 14.2 8.4 65.1 13.2 51.9 -1.6 0.0 53.5 9.9 17.2 FY12 520.1 14.1 203.1 80.1 131.3 414.4 105.7 21.8 15.9 23.0 12.8 79.5 21.1 58.5 -1.1 0.0 59.6 11.4 19.1 FY13E 690.0 32.7 256.2 115.1 163.2 534.5 155.5 47.2 19.1 21.3 4.7 113.6 26.8 86.8 -1.7 0.0 88.5 48.4 28.4 FY14E 795.1 15.2 286.2 127.2 202.8 616.2 178.9 15.0 24.1 19.7 8.0 143.1 30.3 112.8 0.0 0.0 112.8 27.5 36.2

Cash flow statement

(Year-end March) / (| crore) Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities Other Investments (Purchase)/Sale of Fixed Assets Deferred Tax Liability Minority Interest CF from investing activities Inc / (Dec) in Equity Capital Inc / (Dec) in Sec Loan Funds Inc / (Dec) in Unsec. Loan Funds Dividend & Dividend tax Inc/(dec) in Sec Pre Account CF from financing activities Net Cash flow Opening Cash Closing Cash FY11 53.5 15.9 -33.0 5.0 41.4 -1.2 -60.6 -1.7 -3.9 -112.0 0.0 34.7 67.0 -6.6 0.0 94.9 24.2 8.1 32.3 FY12 59.6 15.9 -62.5 33.2 46.2 0 -151.3 3.8 -0.2 -139.8 3.0 29.4 9.3 -10.9 64.5 97.9 4.3 32.3 36.6 FY13E 88.5 19.1 -78.4 96.2 125.5 0 -80.0 4.0 -0.8 -82.2 0.0 -30.0 0.0 -12.8 0.0 -42.8 0.5 36.6 37.1 FY14E 112.8 24.1 -36.6 13.4 113.7 0 -60.0 4.0 0.9 -59.4 0.0 -20.0 0.0 -14.6 0.0 -34.6 19.7 37.1 56.8

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Balance sheet
(Year-end March) / (| crore) Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Long Term Provisions Total Liabilities Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Net Intangibles Investments Inventory Debtors Loans and Advances Cash Other Current Assets Total Current Assets Creditors Provisions Other Current Liabilities Total Current Liabilities Net Current Assets LT L & A & Other Non CA Application of Funds FY11 28.1 324.3 352.4 221.2 25.1 1.1 8.67 608.5 354.0 100.7 253.3 76.0 329.3 16.9 62.6 102.2 71.0 40.4 32.3 0.1 246.1 76.6 0.9 21.34 98.9 147.3 52.5 608.5 FY12 31.2 440.0 471.2 260.0 28.9 0.9 9.8 770.7 417.3 116.4 300.9 164.4 465.3 16.2 62.5 110.4 94.7 70.1 36.6 1.1 312.9 92.4 0.7 39.01 132.0 180.9 45.8 770.7 FY13E 31.2 515.8 546.9 230.0 32.9 0.1 12.8 822.6 621.7 134.9 486.8 30.0 516.8 25.6 62.5 142.9 108.6 101.6 37.1 1.5 391.8 162.9 21.2 44.2 228.2 163.6 54.1 822.6 FY14E 31.2 614.0 645.1 210.0 36.9 1.0 15.8 908.7 681.7 158.2 523.5 20.0 543.5 34.8 62.5 171.5 136.3 82.0 56.8 1.6 448.1 167.7 21.8 52.2 241.7 206.4 61.5 908.7

Key ratios
(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio
[

FY11 17.2 22.3 113.1 2.0 10.4 19.0 14.6 11.7 73.7 58.2 62.8 15.2 12.3 10.8 19.8 16.3 3.2 1.3 2.8 2.5 0.6 2.5 2.2

FY12 19.1 24.2 151.3 3.0 11.8 20.3 15.7 11.5 76.6 68.2 66.5 12.7 12.3 9.6 17.8 13.7 2.9 1.1 2.4 2.5 0.6 2.4 2.1

FY13E 28.4 34.5 175.6 3.5 11.9 22.5 17.2 12.8 70.0 60.0 90.0 16.2 17.6 14.2 12.0 9.1 2.1 1.2 1.9 1.5 0.4 1.7 1.6

FY14E 36.2 43.9 207.1 4.0 18.2 22.5 18.7 14.2 75.0 65.0 80.0 17.5 18.1 15.4 9.4 7.7 1.8 1.2 1.6 1.2 0.3 1.9 1.6

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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ICICIdirect.com coverage universe (Healthcare)

Company Apollo Hospitals Aurobindo Pharma Biocon Cadila Healthcare Divi's Laboratories Elder Pharma Fortis Healthcare Glenmark Pharma Indoco Remedies Ipca Laboratories Jubilant Life Sciences Lupin Natco Pharma Opto Circuits Strides Arcolab Sun Pharma Torrent Pharma Unichem Laboratories I-Direct Code APOHOS AURPHA BIOCON CADHEA DIVLAB ELDPHA FORHEA GLEPHA INDREM IPCLAB VAMORG LUPIN NATPHA OPTCIR STRARC SUNPHA TORPHA UNILAB CMP TP (|) (|) 805 170 295 844 331 104 425 67 427 211 585 393 125 694 666 183 Rating M Cap (| Cr) 11,193 4,956 5,904 17,274 15,475 679 4,200 11,515 614 5,390 3,353 26,159 1,223 3,022 5,065 71,890 5,633 1,657 EPS (|) PE(x) EV/EBITDA (x) RoCE (%) RoNW (%) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E 16.1 -4.2 16.9 31.9 41.1 34.5 1.8 17.0 5.0 22.0 0.9 19.4 19.1 23.6 38.5 25.0 33.6 7.9 23.0 15.0 18.5 33.1 49.1 42.4 NA 20.7 6.8 29.4 24.2 25.6 28.4 24.2 45.2 24.4 47.7 14.8 26.6 22.4 52.4 62.2 60.2 27.9 9.6 39.7 32.5 36.2 28.5 67.2 29.7 53.8 18.1 49.8 17.4 26.5 28.3 9.6 25.0 13.2 19.5 30.1 17.7 5.3 22.4 27.8 19.8 23.2 34.9 11.3 16.0 25.5 23.7 7.8 NA 20.6 9.8 14.5 8.7 22.8 11.9 5.2 19.1 28.4 14.0 12.4 30.3 8.8 13.2 16.1 18.8 5.5 NA 15.2 6.9 10.7 6.3 18.0 9.4 4.4 12.8 23.4 12.4 10.1 22.9 13.0 10.4 18.4 21.6 8.1 25.7 15.9 9.4 11.6 7.9 18.9 13.7 6.3 14.2 22.0 11.1 14.4 18.2 8.6 9.5 14.2 17.1 6.2 NA 14.1 6.9 9.2 6.2 14.2 9.1 4.9 11.2 16.3 9.1 8.5 15.4 6.9 7.9 10.5 13.2 5.0 NA 11.0 5.7 7.6 5.2 11.4 7.7 3.8 8.7 16.9 7.5 6.7 11.7 7.6 15.9 21.7 28.4 9.3 2.1 15.3 11.7 24.7 10.5 21.8 12.3 20.0 10.4 27.8 24.9 12.0 13.7 11.5 18.6 23.2 30.3 11.6 NA 20.4 14.7 27.5 12.7 26.9 17.6 22.4 12.8 32.6 27.7 19.7 14.9 14.0 19.8 29.8 31.8 13.7 NA 24.3 15.9 28.5 14.0 28.7 18.1 24.0 15.9 27.5 28.1 21.8 8.7 10.77 11.32 -5.3 14.9 28.7 25.1 10.3 2.2 19.3 12.0 22.1 0.6 22.1 12.7 33.7 16.4 21.3 25.8 10.8 16.0 14.7 25.2 25.4 10.6 NA 21.5 14.3 23.7 14.6 23.9 16.2 27.7 43.3 19.0 30.3 17.6 17.6 15.9 32.4 26.1 13.9 NA 24.2 17.1 25.2 17.1 24.6 17.5 26.4 17.0 19.6 27.4 18.4 19.4 -40.1 747 HOLD 110 HOLD 313 BUY 944 BUY 342 HOLD NA UR 503 BUY 77 BUY 517 BUY 274 BUY 650 BUY 452 Buy 256 BUY 684 HOLD 753 BUY 217 BUY

1166 1181 HOLD

NA 451.2

33.4 229.9

862 1007 BUY

Exhibit 13: Recommendation History

450 400 350 300 250 200 150 Nov-11 Jan-12 Feb-12 Mar-12 Price
[

May-12

Jun-12

Aug-12

Sep-12

Nov-12

Target Price

Source: Company, ICICIdirect.com Research

Exhibit 14: Recent Releases

Date 22-Mar-12 4-Apr-12 31-May-12 5-Jul-12 16-Aug-12 8-Oct-12 Event Initiating Coverage Q4FY12 Preview Q4FY12 Result Update Q1FY13 Preview Q1FY13 Result Update Q2FY13 Preview CMP 340 365 399 340 361 379 Target Price 352 352 378 378 378 378 Rating HOLD HOLD HOLD HOLD HOLD HOLD

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 7

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Siddhant Khandekar CA INTER Krishna Kiran Konduri MBA FINANCE research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
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