NATCO PHARMA - UNDERVALUED STOCK

Investment Analyst, Ashish Chugh is of the view that Natco Pharma is a very undervalued stock and a safer investment.

Chugh told CNBC-TV18, "Natco Pharma is a very undervalued stock. It is a company based in Hyderabad. This company is mainly into the oncology business and this company is ranked number one in India in the oncology segment. The management expects to grow the oncology business by about 20% every year over the next three years.

He further added, "There are a few interesting developments taking place in this company, one is that this company is increasing its presence in the retail pharma space in the US through acquisition of retail pharma stores. They have already acquired three stores and they are scouting for more acquisitions in this space in the US."

"Secondly, this company’s major strength is research and they are currently doing clinical trials for oncology drug, which they have developed. The phase I of clinical trials have already begun and commercialization of this drug will lead to a substantial benefit to the company and the shareholders."

"Thirdly, this company has entered into a tie up with Mylan Inc for worldwide sales of a drug, which they have developed. This drug is called Glatiramer Acetate, the other company which is making and marketing this drug is Tava Pharmaceuticals of Israel. This drug is a USD 3 billion drug and Teva currently has a monopoly position in this drug. Now the agreement with the Mylan is that Mylan will do the clinical trials and they will incur all the expenditure, which is involved in the clinical trial for this drug and they will do the regulatory approvals and registration of this drug in the US."

"It may so happen that since this drug is going to threaten the monopoly of Teva, they may try to maybe delay the launch or they may file a suit against Natco Pharma, which may lead to a slight delay but whenever the commercialization of this drug happens, it could be a big leap forward for Natco Pharma."

"This company did sales revenues of about 330 crore for FY08. They made a profit after tax of about 42 crore-I am talking about the consolidated numbers, which means an EPS of close to Rs 14. At the current price of Rs 75, this stock trades at a price to earnings ratio less than 6."

"Another comforting factor or the margin of safety in this investment is that this company holds a land bank close to 300 acres, which is close to the new Hyderabad airport. This land bank alone is valued at between 250 and 300 crore, which is more than the current marketcap of this company which stands at about 200 crore."

"So one has a company, which is available at reasonable valuation, it is growing through the inorganic route by acquiring retail pharma stores in the US. There could be a very big trigger-it may take two-three years for that Mylan thing to materialize but as and when it materializes, it will lead to a quantum-it will basically position Natco on a different platform altogether. Also their strength in the oncology segment and the new drug discovery, which is happening. So one has a company which is trading at reasonable valuation and one has a good margin of safety also by way of the land bank of 300 acres which the company has. So at this price I think the stock merits investment."



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