Anand Rathi: Dishman Pharma Turnaround in business; initiate with Buy

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Dishman Pharma
Turnaround in business; initiate with Buy
We initiate coverage on Dishman Pharma with Buy and target price
of `258. We are positive on the stock given turnaround in Solvay
contract and operations at Carbogen Amcis (CA), addition of new
contracts and commissioning of new high potency (HIPO) facility.
 Set to witness turnaround. Dishman is set to witness turnaround
after a dismal performance in the past five quarters on the back of : i)
revival in Solvay contract for Eposartan Mesylate (supplies at normal
level of 120mtpa at present), ii) signing of an additional contract for
fenofibrate, iii) restructuring at CA subsidiary and iv) improving
outlook for outsourcing business.
 Expansion in niche and high-end segment. With its HIPO
facility, Dishman would be substantially expanding presence in the
niche and high-end oncology API space. We expect the company to
generate US$4m & US$20m in FY11e & FY12e respectively from the
facility on the back of expected commercialisation in Q4FY11.
 Expect robust H2FY11 and FY12. We believe Dishman is wellpositioned
to deliver a strong performance with 16.7% top-line and
25.9% net profit CAGRs over FY10-13e. D/E would reduce to 0.6x
in FY13e from current 1x and RoCE would improve to 11.9% in
FY13e from 9% in FY10.
 Valuation and risks. Our target price is based on 10x FY12e
CRAMS EBITDA and 4x FY12e Marketable Molecules EBITDA.
The stock trades at 11.2x FY11e and 9x FY12e earnings and looks
attractive, given turnaround story and past 3-year average forward PE
of 14x. Risk: High dependence on Solvay (~15% of sales).