Multi Baggers

Dishman Pharmaceuticals & Chemicals

COMPANY BACKGROUND

Incorporated in 1983, Dishman Pharmaceuticals and Chemicals Limited is an Indian based company involved in manufacture of active pharmaceutical ingredients (API's) intermediates headquartered in Ahmedabad.

The company operates in two segments: Contract research & contract manufacturing and bulk drugs, intermediates and speciality chemicals. It provides wide range of products to the global market including range of reagents, API's, speciality chemicals and their intermediate. It also offers a range of bulk active pharmaceutical ingredients and intermediates for commercial applications, outsourced products, antiseptics and disinfectants to the healthcare and related industry applications for use as disinfectants for surgical instrumentation, hand and body wash sanitizers and anti microbial washes, phase transfer catalyst and fine chemicals.

In FY10, the Company established a wholly owned subsidiary company in the name of Dishman Care Limited for disinfectant project.

Key Highlights

Dishman Pharma reported revenue growth of 26.5% yoy and 13.5% qoq to Rs 269Cr primarily driven by strong performance across its Marketable Molecule business which grew by 93% yoy to 100Cr and QUATs segment which grew by 145% to Rs 67Cr. CRAMS business remained muted with 5% yoy growth to Rs 169Cr led by 16% yoy growth in Carbogen AMCIS revenue to Rs 106Cr. Revenues from the Indian facilities declined 10% yoy to Rs 63Cr.

EBITDA increased by 27% yoy and 9.3% qoq to Rs 47Cr on account of healthy top-line growth and operational efficiencies. Overall EBITDA margin stood flat at 17.4%. EBITDA remained flat due to lower level profitability in the Vitamin D segment. EBITDA margin of the vitamin D business dropped by 900bps to 19% in Q2FY12 due to adverse product mix.

During the quarter, the company reported net loss of 7 Cr on back of 18Cr loss due to non-cash expenses. The decline in the bottom line was further accentuated by 55% increase in interest expense to Rs 14Cr and 22% increase in depreciation on yoy basis.

STRENGTHS

New facilities and projects to add up utilisation from FY12

The company's high potency unit which makes Gemcitabine has started its commercial supplies last quarter. The company also began supplies of new CVS drug recently approved by the FDA to one of its European innovator partners. Dishman booked USD 6m in revenue from the supplies in Q1FY12 and is expected to report additional USD 6m in revenues over the next two quarters. Dishman Pharma is the single source for Eprosartan to Abbott expecting to double its supplies from FY12. The order size is USD 100m for three year contract.

Reduce debt from sale proceeds of its China facility

The management has decided to sell its Chinese manufacturing unit due to expected delays in approvals from the Chinese authorities and use the proceeds to repay some of its loan thereby reducing its debt levels. The current D/E ratio of the company stands at ~1.

KEY CONCERN

The company is facing declining demand from Carbogen AMCIS (CA) customers and restructuring operations to improve profitability. This shall impact the top line growth in FY12.

OUTLOOK & VALUATION

Given India’s cost advantage and chemistry skills, the macroeconomic environment for CRAMS business is expected to remain favourable. Going forward, with the commencement of supplies to Abbott for Teveten and Tricor API, commencement of Vitamin D plant in the next month and ongoing supplies of Gemcitabine from unit IX are the key performance indicators for the company over FY12 and FY13. Revenue CAGR at 10%, EBITDA CAGR of 18% and earnings CAGR of 12% is expected over FY11-13. Earnings are likely to be impacted on back of increased tax rate, forex losses and increase in interest costs. However gradual recovery in business with positive contribution from all subsidiaries shall help in overall profitability of the company. At current levels, the stock is trading at 5.6x and 4.6x its FY12/13 earnings a BUY rating with a price target of 65, an upside of 40% from its CMP of 45.

Disclaimer: The stock may find a place in the proprietary portfolios or in the portfolios of clients of P.N.Vijay Financial Services P Ltd