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Dishman Pharma:: Better times ahead
We met the CFO Mr. V.V.S Murthy of Dishman Pharma and believe that the turnaround in the business is very much round the corner. Following are the key takeaways of the meet.
CRAMS business reaching normalcy:
Last 6 quarters have been very bad for the company majorly due to i) Recession which had resulted in reduction in R&D costs from innovators as close to 65-70% of Carbogen Amcis (CA) sales comes from contract research. CA contributes 55.5% to its CRAMS sales and 40.2% to overall sales. ii) One of its major customers Solvay got acquired by Abbott which had contributed almost 18% to its overall topline.
Conditions are improving as the innovators are once again starting to outsource R&D in order to save costs and Solvay’s order has also reached supply at normal levels (120 mtpa). Management is of the view that although CA is showing signs of improvement but the growth will remain subdued for sometime as the conditions in Europe are improving at a slow pace. Company has reduced cost of almost CHF 6-7 mln in CA during the start of the year to improve operational efficiency.
Capex to drive growth going forward:
Company has a CWIP of ` 3574 mln majority of which will be incurred in Bavla and China facility. Company has developed state of the art manufacturing facility in Bavla which can manufacture Class IV oncology APIs and is the only facility of its kind in the entire Asian region. Company has informed that the EBIDTA margins of the products manufactured in this facility will be almost 500 bps higher than its normal EBIDTA margins (25%+ range). Significant revenues will come from this facility only from 2HFY12 onwards.
China facility will also commence operations from next year onwards and is already attracting a lot of global MNCs. Chinese Pharma market is expected to become almost USD 70 bln by 2013 and thus offers tremendous opportunities. Company’s Vitamin D facility is also ready and it will compliment the Netherland facility which manufactures cholesterol as it is the raw material for the manufacture of Vitamin D. These would bring its marketable molecules (MM) business back on track.
Valuation:
Company has bagged an order from a European MNC which will materialize from Q4FY11 onwards and hence we believe that the company should be back on track from Q4FY11 onwards. At CMP of ` 145 the stock is trading at 9.9xFY10 EPS of 14.6. Although we have not rated the company we remain positive on its future growth prospects.
We met the CFO Mr. V.V.S Murthy of Dishman Pharma and believe that the turnaround in the business is very much round the corner. Following are the key takeaways of the meet.
CRAMS business reaching normalcy:
Last 6 quarters have been very bad for the company majorly due to i) Recession which had resulted in reduction in R&D costs from innovators as close to 65-70% of Carbogen Amcis (CA) sales comes from contract research. CA contributes 55.5% to its CRAMS sales and 40.2% to overall sales. ii) One of its major customers Solvay got acquired by Abbott which had contributed almost 18% to its overall topline.
Conditions are improving as the innovators are once again starting to outsource R&D in order to save costs and Solvay’s order has also reached supply at normal levels (120 mtpa). Management is of the view that although CA is showing signs of improvement but the growth will remain subdued for sometime as the conditions in Europe are improving at a slow pace. Company has reduced cost of almost CHF 6-7 mln in CA during the start of the year to improve operational efficiency.
Capex to drive growth going forward:
Company has a CWIP of ` 3574 mln majority of which will be incurred in Bavla and China facility. Company has developed state of the art manufacturing facility in Bavla which can manufacture Class IV oncology APIs and is the only facility of its kind in the entire Asian region. Company has informed that the EBIDTA margins of the products manufactured in this facility will be almost 500 bps higher than its normal EBIDTA margins (25%+ range). Significant revenues will come from this facility only from 2HFY12 onwards.
China facility will also commence operations from next year onwards and is already attracting a lot of global MNCs. Chinese Pharma market is expected to become almost USD 70 bln by 2013 and thus offers tremendous opportunities. Company’s Vitamin D facility is also ready and it will compliment the Netherland facility which manufactures cholesterol as it is the raw material for the manufacture of Vitamin D. These would bring its marketable molecules (MM) business back on track.
Valuation:
Company has bagged an order from a European MNC which will materialize from Q4FY11 onwards and hence we believe that the company should be back on track from Q4FY11 onwards. At CMP of ` 145 the stock is trading at 9.9xFY10 EPS of 14.6. Although we have not rated the company we remain positive on its future growth prospects.
Dishman has had 6 quarters of continuos degrowth as far as CRAMS is concerned but we feel that the business will be back on track as:
1) It has already received an order of ` 300 mln from an MNC which will be executed in Q4FY11 and a repeat order is also expected next year.
2) Company’s Bavla facility has gone onstream and significant sales are expected from 2HFY12 onwards from this facility. It’s the only facility in the entire asian region which can manufacture Category IV oncology APIs and hence is generating a lot of interest from global MNCs. As of now Category IV drugs are still under development so till that time company will be manufacturing Category I to III APIs. Company has invested close to ` 1.2 bln in this facility. The facility is likely to generate sales of USD 40-50 mln. The impact on EBIDT will be far more than the impact on topline since these are higher margin products (25%+ margins).
3) Company has also invested close to ` 990 mln on its China facility and sales will start commencing from 2HFY12 onwards. Global MNCs like J&J are showing good interest in the facility and it will start production from FY12 onwards. We are expecting peak sales of USD 30-35 mln from this facility. The China facility will also be manufacturing Category II and III oncology products. The facility was created to hedge against geographical risks.
4) One of the major reasons for degrowth in the CRAMS business was the temporary halt in supply order form Solvay which used to contribute almost 18% to its overall revenues as the company got acquired by Abbott last year. The supply order has once again commenced and has reached normal levels. Company has issued a dedicated facility for Solvay order for its product Eprosartan Mesylate with a capacity of 180 mtpa. The company is currently running at capacity of 120 mtpa. Company also does contract research for the same.
5) Company is expecting a lot more orders from Abbott going forward as it has a very good relationship from Solvay and it can leverage this relationship to get some bigger orders from Abbott. Dishman has already received an order for fenofibrate and has set up a separate facility of 200 mtpa for the order.
6) CA has been witnessing major slowdown as 65%-70% of its sales comes from contract research and innovators had reduced R&D costs at the time of recession. Company has reduced its sales force and brought down its other expenses which have resulted in significant reduction in costs of CHF 6-7 mln. We believe that this trend will continue with slight improvement in its topline by next year. There has been increase in the number of inquiries compared to last year.
Steady growth expected in MM business: MM includes selling of quarternary compounds, speciality chemicals, intermediates, APIs and Vitamin D. These moleules are used in various industries like pharma, agrochemicals, etc. Dishman acquired Solvay’s fine chemicals, vitamin D & analogues businesses in FY08 and is classified under the MM segment. Company has invested around ` 250 mln in its Vitamin D facility which will be complimenting its cholesterol manufacturing facility in Netherlands. This facility will help dishman achieve forward integration and improve its margins as well. We believe that MM business will show consistent growth going forward. Outlook: The global scenario for CRAMS is improving and Dishman is surely going to be one of the biggest beneficiaries because of the significant investment done by the company in niche areas. We are of the view that Dishman should show improvement in topline from Q4FY11 onwards. At CMP of ` 145 the stock is trading at 9.9xFY10 EPS of 14.6. Management has guided for a topline growth of 15% for FY12 which in our view is easily achievable since both its major manufacturing facilities will be operational by next year.
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