Multi Baggers

FY2006 - Stepping stone for all round growth

During FY 2006, DIL management took various initiatives to ensure sustained all round growth of the company. Some of the major initiatives taken were: (1) cleaning up balance sheet, (2) investment in infrastructure and (3) strengthening of its marketing activities to increase revenues from bulk drugs, contract research & custom synthesis services. DIL made contribution of Rs 22 mn in FY06 towards corpus of superannuation fund which is one time in nature and made substantial efforts towards developing its business & services in international markets. DIL made a capex of about Rs 85 mn, a substantial part of which was for setting-up a new R&D centre at Thane for contract research & custom synthesis services.

FY2007 - Bright prospects

In Q1 FY07, DIL's revenues grew by 19.9% YoY to Rs.111.4 mn while its EBIDTA grew by 26.8% to Rs 25.9 mn and its EBIDTA margin grew by 125 bps to 23.3% in Q1FY07. Depreciation for the quarter increased considerably by 59.4% YoY to Rs 6.8 mn mainly on account of commencement of new R&D centre. Its APAT grew by 45.7 YoY to Rs 19.6 mn in Q1FY07.

DIL's Revenues from the bulk drugs business grew by 18.6% YoY to Rs 84.1 mn and it improved its segmental PBIT margin by 720 bps in Q1FY07. Given that DIL has started aggressive marketing activities in international markets, management is confident of maintaining the current growth momentum for the rest of the year.

Dil's Income from R & D division, which undertakes contract research & custom synthesis services, increased by 69.9% YoY to Rs 19 mn in Q1FY07. However, high depreciation charge on account of the newly commissioned R&D centre led to decline in PBIT margins. DIL is confident of doubling its revenues & achieving positive PBIT during FY07 from its R&D division in the current year.

DIL has already started providing research services (through FTE & Custom synthesis models) to a few of the leading MNC clients and in our opinion, is very well placed to bag many more larger contracts going forward. We expect its R&D division to achieve not only high growth in revenues but also report good margins over the next 2-3 years as it starts executing large new projects.

DIL has recently leased out its property at Worli, Mumbai for a lease rental of around Rs 2.5 mn per month from July 2006 onwards. With this, during FY07, we expect the company to earn a rental income of more than Rs 40 mn and from FY08 onwards, DIL could earn about Rs 50 mn per year as rental income.

Outlook & Valuation

DIL management has taken some key initiatives in the recent past such like shifting of bulk manufacturing business to Kullu which is a tax free zone, increased marketing spend on core businesses, development of a new R&D centre, renting out of excess space available at its premises at Thane & Worli for generating consistent lease rentals, amongst others, which we believe will ensure healthy profit growth for the company going forward. Moreover, DIL has around Rs 290 mn at its disposal for suitable acquisition which could further prove to be a booster for revenues and profits. DIL is one of the well managed; fundamentally sound company with growth visibility in all the segments that it is operating.

We are confident of DIL achieving its estimates for FY07, as income from contract R&D, lease rentals and manufacturing bulk drugs is likely to grow at a healthy pace. At the CMP of Rs 239, the stock is quoting at 4.8x its FY07E EPS of Rs 49.5 and at an EV/CP of 1.8x. This means, at FY07 estimates, DIL as an enterprise is available at a valuation which is equal to two years of its cash profit. Moreover, here we have not considered the valuation of its property at Thane & Worli, which could be more than Rs 600 mn, if the expected Rs 50 mn of recurring rental income is of any indication. This in our opinion is very attractive. We remain positive on the company's long term prospects and retain our Buy rating on the stock with a price target of Rs 625 with a two year holding period. At the target price of Rs 625, the stock would quote at a PER of 12.5x and an EV/Cash Profit of 8x, based on FY07E numbers.