Dishman Pharmaceuticals – 2QFY2011 Result Update-Angel Broking

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 Dishman Pharmaceuticals – 2QFY2011 Result Update

Angel Broking maintains a Buy on Dishman Pharmaceuticals with a Target Price of Rs228.

Dishman Pharmaceuticals (Dishman) reported in-line revenues for the quarter.

OPM however, contracted on the back of certain contract research activities for

which the commensurate revenue flow is likely to accrue in the future.

Moreover, revenue growth guidance by management for FY2011 (10%) and

FY2012 (15%) was disappointing. We have lowered our estimates due to the

slower-than-expected recovery in the CRAMS segment. However, maintain a

Buy on the stock owing to reasonable valuations.

Revenue in line but OPM disappoints: Dishman reported net sales to the tune

of `213cr (`217cr), down 2.1% yoy and in line with our estimates. The

company clocked revenues of `158cr (`162cr) in the CRAMS segment, down

2.3% due to slow pick-up on the contract research front. Dishman reported

552bp yoy decline in OPM to 17.4% (22.9%) as commensurate revenue flow

for certain contract research activity is likely to accrue in the future. Net profit

came in at `28cr (`25cr), which was ahead of our estimates buoyed by forex

gains of `19cr for the quarter.

Outlook and Valuation: We have lowered our FY2011 and FY2012 numbers

owing to the slower-than-expected recovery in the CRAMS segment. We

expect net sales to clock CAGR of 13.4% to `1,177cr and EPS to register

CAGR of 10.1% to `17.5 over FY2010-12. At current levels, Dishman is

trading at reasonable valuations of 12.5x and 9.9x FY2011E and FY2012E

earnings, respectively. We maintain a Buy on the stock, with a revised Target

Price of `228 (`279)

Concall takeaways

􀂄 The company has revised downward its revenue growth guidance for FY2011

to 10% from the earlier 15-20% due to the slower-than-expected recovery in

the CRAMS space. For FY2012, the company has conservatively guided for

15% revenue growth. On the margins front, the company appears confident of

achieving 25% OPM for FY2011, in spite of clocking 19.6% OPM in

1HFY2011.

􀂄 On the positive front, Dishman stated that two new MNC clients have selected

it as there preferred supplier and expects significant revenue flow from

FY2013 onwards. The company expects one of these clients to become one of

their largest customers (>10% of revenue) going ahead.

􀂄 On the back of robust demand for oncology products, Dishman has planned

to partially convert its current China API facility into an oncology product

facility (Type II and III category) and would require minimal capex.

Investment Arguments

􀂄 Capex benefits to accrue from FY2012 onwards: Dishman is well placed to

benefit from the organic capex of `300cr incurred over the last three years

towards building its China and Hipo facilities and expansion of other existing

facilities at its Bavla unit targeting the European and Asian markets. Post the

new facilities getting operational, Dishman is likely to enter into long-term API

supply contracts with these players resulting in stable revenue flow going

ahead. The company’s ties with the global innovators would also strengthen

apart from reducing its dependence on Abbott.

􀂄 Abbott contract back on track: Abbott has been one of the key clients (13%

sales and 17% of operating profit in FY2010) for Dishman. As per a long-term

contract, Dishman primarily supplies Eprosartan (Teveten) API to the company.

Revenues from the contract posted a CAGR of 36.1% to `174.0cr over

FY2007-09 driven by increasing off-take of Eprosartan resulting in higher

margins. However, during FY2010, key products of Solvay, viz. Tricor and

Teveten de-grew on account of inventory rationalisation in the channels and

acquisition by Abbott leading to revenues of `120cr. With the global inventory

rationalisation likely to end and the acquisition of Solvay by Abbott now

completed, we expect the contract to normalise in FY2011.

Outlook and Valuation

We have lowered our FY2011 and FY2012 numbers owing to the slower-thanexpected

recovery in the CRAMS segment. We expect net sales to clock CAGR

of 13.4% to `1,177cr and EPS to register CAGR of 10.1% to `17.5 over

FY2010-12. At current levels, Dishman is trading reasonable valuations of

12.5x and 9.9x FY2011E and FY2012E earnings, respectively. We maintain a

Buy on the stock, with a revised Target Price of `228 (`279)