Dishman Pharma- Disappointments unabated : Avendus

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Dishman Pharmaceuticals & Chemicals
Target Price (INR) 164 Disappointments unabated



DISH continued its disappointing streak with 2QFY11 delivering
lower‐than‐expected results. While consolidated revenues declined 2%
during the quarter, PAT of INR295mn was primarily supported by forex
gain of INR196mn. The CRAMS and MM segments put on a poor show,
and the company seems unable to get a grip. Operating margins were
at their lowest for at least the past 12 quarters. This brings to the
forefront the risks to the bottom line, led by lack of traction on the top
line. DISH has lowered its FY11 revenue guidance to 10%, while we
have built in a contraction. While some interesting opportunities are
likely to pan out, the continued disappointment is likely to impact
sentiments. We cut our PAT forecasts during FY11‐FY13 by up to 20%
and roll over the target to Dec11. We maintain Hold with TP of INR164.




Revenue decline of 2% marks the sixth consecutive quarter of a fall
In 2QFY11, DISH reported a 2% y‐o‐y fall in consolidated revenues to INR2.1bn
against our expectation of 15% growth. The Sep10 quarter marks the sixth
consecutive quarter of a fall in revenues. There was a contraction in the CRAMS
and MM segments. Operating margins, excluding forex, were at their lowest ‐
at least since Jun07. According to the company, c40% of the research capacity
was used for non‐billable work, which affected margins. Higher employee costs
(hiring in QA/QC and project management) also affected profitability. PAT of
INR295mn was, however, higher than expectations, led by forex gain of
INR196mn. Excluding the forex component and the tax impact thereon, PAT of
INR98mn is over 50% lower y‐o‐y.

Key takeaways from the call
1) At least two major US pharma companies have signed up DISH as a preferred
supply partner; 2) Two new projects are likely to be commercialized in the near
term; one of which is likely to be AstraZeneca’s Brilinta; 3) The Hi‐po unit at
Bavla is likely to start contributing from 1QFY12f; 4) EBITDA margins in 3QFY11f
are also likely to be subdued as significant research capacities remain directed
to non‐billable work; 5) A part of DISH’s Chinese facility would be converted
into a hi‐po unit with investment of USD1mn; 6) FY11f capex at INR1.5bn; 7)
Gross debt at end Sep10 stands at INR8.2bn; 7) The company has dropped its
FY11f revenue guidance to 10% from 18%‐20% earlier; FY12f revenue guidance
has been set at 15%.

No respite in sight; cut estimates by up to 20% and cut TP to INR164
DISH’s poor show continues and there appears to be no respite in sight. While
some interesting opportunities like supplies to AstraZeneca and manufacturing
contracts from the hi‐po unit could unfold, the consistent disappointment in
performance is likely to hurt investor sentiments. For FY11f‐FY13f we lower our
revenue estimates by up to 10%. With the top line unable to find a grip,
profitability is likely to be adversely affected, even as investments are likely to
continue. We cut our PAT forecasts during FY11f‐FY13f by up to 20% and roll
over the target to Dec11. We maintain Hold with a TP of INR164.