Dishman Pharma-Another disappointing quarter;HOLD :: Religare

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Dishman Pharmaceuticals & Chemicals Ltd
Another disappointing quarter; downgrade to HOLD


Dishman Pharmaceuticals (DISH) reported a disappointing set of numbers for
Q2FY11. While revenues were in line with estimates, adj. PAT was over 50%
below our/street expectations. The company’s profitability hit its lowest level in
the last 12 quarters; though we expect it start improving from next quarter
onwards, the process will be gradual. The company has also cut its already
subdued (15%) revenue growth guidance for FY11E to 10%. Earlier, we were
expecting a sharp recovery in H2FY11E; however, this seems unlikely now,
given the company’s poor show in recent quarters and a bleak outlook for
CRAMs. Hence, we are lowering our FY11E/12E earnings estimates by 29%
(assuming lower revenue growth, EBITDA margin contraction). This also leads
us to downgrade the stock from BUY to HOLD and revise our target price
from Rs 280 to Rs 192 (based on Sept ‘12E earnings).


Net sales flat YoY: DISH reported flat net sales for the quarter. Barring
India-based marketable molecules business, all segments (as expected) reported a
dismal performance during Q2FY11.
EBITDA margin plunges 350bps: DISH’s EBITDA margin contracted 350bps to
17.4% due to: a) diversion of ‘billable’ contract research resources to internal work
(non-billable); b) rise in staff costs on higher recruitments, mainly in the quality
control, quality assurance and project management divisions and c) lower
profitability in existing contracts.
Adj. PAT nosedives 45%: A poor performance at the operating margin level
lowered the company’s adj. PAT by 45% YoY to Rs 105mn.
Revenue growth and margin outlook: The management has lowered its topline
guidance for FY11E and also guided to a subdued FY12E ahead. On the margins
front though, the management has indicated a sharp recovery in H2FY11E which
would sustain through FY12E. We, however, conservatively model for a 4%
topline growth for FY11E (as against the guided 10%) and margins of
21.2%/24.3% for FY11E/FY12E (as against the guidance of 24%/25%).
Downgrade to HOLD: We are pruning our earnings estimates significantly due to
a) the lack of visibility in overall CRAMs segment and b) DISH’s disappointing
track record. We are also lowering the target multiple (from 13x to 11x) to adjust
for the lower-than-expected recovery in the growth trajectory. At our revised
earnings, the stock would trade at a PER of 12x FY12E earnings. These valuations
would be at the lower-end of the historical trading band. We revise our target
price to Rs 192 (from Rs 280 earlier) and downgrade the stock to HOLD.