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Dishman Pharmaceuticals and Chemicals (DISH) posted 2QFY12 performance that was lower than our estimates.
DISH reported 2QFY12 revenue growth of 26.5% YoY to INR2.69b (against our estimate of INR2.68b), led mainly by
its Marketable Molecule (MM) business. EBITDA increased by 27.4% YoY to INR471m (against our estimate of
INR543m) and DISH reported a net loss of INR64m (against our profit estimate of INR171m) impacted by poor
operational performance coupled with increased interest and depreciation expenses and INR187m of forex losses.
Top-line growth was led by the MM segment, which posted strong revenue growth of 93% YoY to INR1b. CRAMS
revenue reported muted growth of 5% YoY to INR1.69b (63% contribution to revenue) led by a 16% YoY growth in
Carbogen AMCIS (CA) revenue to INR1.06b.
EBITDA increased by 27.4% YoY to INR471m (against our estimate of INR543m) led by healthy top-line growth.
Overall EBITDA margins remained flat YoY at 17.5% (against our estimate of 20.3%).
DISH reported net loss of INR64m due to poor operational performance coupled with an increase in interest and
depreciation charges and INR187m of MTM forex loss due to foreign currency debt.
Outlook and view: The macro environment for the CRAMS business remains favorable, given India's inherent cost
advantages and chemistry skills. We believe DISH's India operations will benefit from increased outsourcing from India,
given its strengthening MNC relations and expansion of some existing customer relationships. However, the adverse
business environment for CA will continue to impact earnings growth in FY12 and FY13. We expect revenue CAGR of
8.6%, EBITDA CAGR of 19.4% and earnings CAGR of -11% over FY11-13. Earnings growth will be impacted mainly by
a significant increase in tax rate (due to expiry of EoU benefits), forex losses and increase in interest costs. Based on
our revised estimates, the stock trades at 8.3x FY12E and 5.8x FY13E earnings. RoE will continue to be below 10%
until new facilities and CRAMS contracts ramp up. Maintain Neutral rating with a target price of INR63 (8x FY13E EPS).
DISH withdraws FY12 guidance
The management withdrew its FY12 guidance, citing uncertainty in the business and
unstable currency rates. Its earlier FY12 guidance was for 15% top-line and PAT growth.
CA top-line growth is expected to be flat given the ongoing restructuring at DISH coupled
with a lack of new projects. We are forecasting 12% top-line growth for FY12, adjusting
for one-time revenue, booked in FY11 and based on our cautious view on the contribution
of some of the new CRAMS projects at Indian facilities. Further, we expect adjusted PAT
to decline by 44.5% YoY to INR451m as FY11 profit was boosted by INR350m in foreign
exchange gains
DISH to sell China facility, expects USD25m; Plans to repay some of its
loans
The management has decided to sell its Chinese manufacturing unit due to delays expected
in receiving cGMP approval from the Chinese authorities. DISH mentioned that as per
recently changed laws, it would take another 3-4 years to get cGMP approval from China,
which would make the investment unviable. DISH has started selling the asset and expects
to get at least USD25m from the sale. DISH invested the same amount in the facility. The
company also said that, out of the four blocks, one was a high-potency unit and that it
plans to repay some of its loans from the sale proceeds.
New facilities, projects to come up for utilization from FY12
DISH's high-potency unit, which makes Gemcitabine, started commercial supplies last
quarter. DISH also began supplies of a new CVS drug, recently approved by the FDA, to
one of its European innovator partners. DISH booked USD6m in revenue from the supplies
in 1QFY12 and it is expected to report an additional USD6m in revenue over the next two
quarters. The Abbott (Solvay relationship) made DISH a single source for Eprosartan
from CY12, which will double the quantity supplied by DISH to Abbott from CY12. The
total order size is USD100m for a three-year contract. Incremental revenue contribution
is also expected from commissioning of a new disinfectant facility.
Cutting FY12, FY13 EPS estimates
Based on DISH's disappointing 2QFY12 results and the management's withdrawal of its
FY12 guidance, we are cutting revenue estimates for FY12 and FY13 by 7% and 10%
respectively. Given higher interest costs expected due to increased debt and INR187m
MTM forex losses reported in 2QFY12, we are cutting our FY12 and FY13 EPS estimates
by 37% and 29% respectively to INR5.6 (down 44.5%) and INR7.9 (up 42.7%)
Outlook and view
The macro environment for the CRAMS business remains favorable, given India's inherent
cost advantages and chemistry skills. We believe DISH's India operations will benefit
from increased outsourcing from India, given its strengthening MNC relations and expansion
of some existing customer relationships. However, CA's adverse business environment
will continue to impact earnings growth in FY12 and FY13. We expect revenue CAGR of
8.6%, EBITDA CAGR of 19.4% and earnings CAGR of -11% over FY11-13. Earnings
growth will be impacted mainly by a significant increase in tax rate (due to expiry of EoU
benefits), forex losses and increase in interest cost.
Based on our revised estimates, the stock trades at 8.3x FY12E and 5.8x FY13E earnings.
RoE will continue to be below 10% until new facilities and CRAMS contracts ramp up.
We maintain Neutral rating with a target price of INR63 (8x FY13E EPS).
Company description
Dishman Pharmaceuticals and Chemicals (DISH) is one
of the leading players in the CRAMS segment and has
developed strong relationships with innovator companies.
It has established its presence across the CRAMS value
chain and is one of the largest manufacturers of QUATs
globally.
Key investment arguments
We expect DISH to benefit from the expected increase
in pharmaceutical outsourcing from India over the next
few years.
DISH's focus on establishing relationships with new
customers and reducing its dependence on Solvay has
begun to bear fruit. It signed supply contracts with
AstraZeneca and is in advanced talks with large
companies like GSK, Novartis, and J&J for outsourcing
deals.
Key investment risks
DISH has been facing declining demand from Carbogen
AMCIS (CA) customers and is restructuring operations
to improve profitability. This is likely to impact CA's
top-line growth in FY12.
Recent developments
DISH signed a contract with a European MNC to
supply intermediate/APIs for a novel CVS drug.
Valuation and view
We expect DISH's India operations to be a key
beneficiary of the increased pharmaceutical outsourcing
from India given its strong relationships with global
innovator pharmaceutical companies.
Based on our revised estimates, the stock trades at 8.3x
FY12E and 5.8x FY13E earnings. RoE will continue to
be below 10% until new facilities and CRAMS contracts
ramp up. We maintain Neutral rating with a target price
of INR63 (8x FY13E EPS).
Sector view
India is on the threshold of a significant opportunity in
the contract manufacturing space. We expect increased
outsourcing from India as it offers a unique proposition
of low costs coupled with chemistry and regulatory
skills.
High entry barriers will ensure that the top 6-7 players
will command a disproportionate share of this
opportunity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dishman Pharmaceuticals and Chemicals (DISH) posted 2QFY12 performance that was lower than our estimates.
DISH reported 2QFY12 revenue growth of 26.5% YoY to INR2.69b (against our estimate of INR2.68b), led mainly by
its Marketable Molecule (MM) business. EBITDA increased by 27.4% YoY to INR471m (against our estimate of
INR543m) and DISH reported a net loss of INR64m (against our profit estimate of INR171m) impacted by poor
operational performance coupled with increased interest and depreciation expenses and INR187m of forex losses.
Top-line growth was led by the MM segment, which posted strong revenue growth of 93% YoY to INR1b. CRAMS
revenue reported muted growth of 5% YoY to INR1.69b (63% contribution to revenue) led by a 16% YoY growth in
Carbogen AMCIS (CA) revenue to INR1.06b.
EBITDA increased by 27.4% YoY to INR471m (against our estimate of INR543m) led by healthy top-line growth.
Overall EBITDA margins remained flat YoY at 17.5% (against our estimate of 20.3%).
DISH reported net loss of INR64m due to poor operational performance coupled with an increase in interest and
depreciation charges and INR187m of MTM forex loss due to foreign currency debt.
Outlook and view: The macro environment for the CRAMS business remains favorable, given India's inherent cost
advantages and chemistry skills. We believe DISH's India operations will benefit from increased outsourcing from India,
given its strengthening MNC relations and expansion of some existing customer relationships. However, the adverse
business environment for CA will continue to impact earnings growth in FY12 and FY13. We expect revenue CAGR of
8.6%, EBITDA CAGR of 19.4% and earnings CAGR of -11% over FY11-13. Earnings growth will be impacted mainly by
a significant increase in tax rate (due to expiry of EoU benefits), forex losses and increase in interest costs. Based on
our revised estimates, the stock trades at 8.3x FY12E and 5.8x FY13E earnings. RoE will continue to be below 10%
until new facilities and CRAMS contracts ramp up. Maintain Neutral rating with a target price of INR63 (8x FY13E EPS).
DISH withdraws FY12 guidance
The management withdrew its FY12 guidance, citing uncertainty in the business and
unstable currency rates. Its earlier FY12 guidance was for 15% top-line and PAT growth.
CA top-line growth is expected to be flat given the ongoing restructuring at DISH coupled
with a lack of new projects. We are forecasting 12% top-line growth for FY12, adjusting
for one-time revenue, booked in FY11 and based on our cautious view on the contribution
of some of the new CRAMS projects at Indian facilities. Further, we expect adjusted PAT
to decline by 44.5% YoY to INR451m as FY11 profit was boosted by INR350m in foreign
exchange gains
DISH to sell China facility, expects USD25m; Plans to repay some of its
loans
The management has decided to sell its Chinese manufacturing unit due to delays expected
in receiving cGMP approval from the Chinese authorities. DISH mentioned that as per
recently changed laws, it would take another 3-4 years to get cGMP approval from China,
which would make the investment unviable. DISH has started selling the asset and expects
to get at least USD25m from the sale. DISH invested the same amount in the facility. The
company also said that, out of the four blocks, one was a high-potency unit and that it
plans to repay some of its loans from the sale proceeds.
New facilities, projects to come up for utilization from FY12
DISH's high-potency unit, which makes Gemcitabine, started commercial supplies last
quarter. DISH also began supplies of a new CVS drug, recently approved by the FDA, to
one of its European innovator partners. DISH booked USD6m in revenue from the supplies
in 1QFY12 and it is expected to report an additional USD6m in revenue over the next two
quarters. The Abbott (Solvay relationship) made DISH a single source for Eprosartan
from CY12, which will double the quantity supplied by DISH to Abbott from CY12. The
total order size is USD100m for a three-year contract. Incremental revenue contribution
is also expected from commissioning of a new disinfectant facility.
Cutting FY12, FY13 EPS estimates
Based on DISH's disappointing 2QFY12 results and the management's withdrawal of its
FY12 guidance, we are cutting revenue estimates for FY12 and FY13 by 7% and 10%
respectively. Given higher interest costs expected due to increased debt and INR187m
MTM forex losses reported in 2QFY12, we are cutting our FY12 and FY13 EPS estimates
by 37% and 29% respectively to INR5.6 (down 44.5%) and INR7.9 (up 42.7%)
Outlook and view
The macro environment for the CRAMS business remains favorable, given India's inherent
cost advantages and chemistry skills. We believe DISH's India operations will benefit
from increased outsourcing from India, given its strengthening MNC relations and expansion
of some existing customer relationships. However, CA's adverse business environment
will continue to impact earnings growth in FY12 and FY13. We expect revenue CAGR of
8.6%, EBITDA CAGR of 19.4% and earnings CAGR of -11% over FY11-13. Earnings
growth will be impacted mainly by a significant increase in tax rate (due to expiry of EoU
benefits), forex losses and increase in interest cost.
Based on our revised estimates, the stock trades at 8.3x FY12E and 5.8x FY13E earnings.
RoE will continue to be below 10% until new facilities and CRAMS contracts ramp up.
We maintain Neutral rating with a target price of INR63 (8x FY13E EPS).
Company description
Dishman Pharmaceuticals and Chemicals (DISH) is one
of the leading players in the CRAMS segment and has
developed strong relationships with innovator companies.
It has established its presence across the CRAMS value
chain and is one of the largest manufacturers of QUATs
globally.
Key investment arguments
We expect DISH to benefit from the expected increase
in pharmaceutical outsourcing from India over the next
few years.
DISH's focus on establishing relationships with new
customers and reducing its dependence on Solvay has
begun to bear fruit. It signed supply contracts with
AstraZeneca and is in advanced talks with large
companies like GSK, Novartis, and J&J for outsourcing
deals.
Key investment risks
DISH has been facing declining demand from Carbogen
AMCIS (CA) customers and is restructuring operations
to improve profitability. This is likely to impact CA's
top-line growth in FY12.
Recent developments
DISH signed a contract with a European MNC to
supply intermediate/APIs for a novel CVS drug.
Valuation and view
We expect DISH's India operations to be a key
beneficiary of the increased pharmaceutical outsourcing
from India given its strong relationships with global
innovator pharmaceutical companies.
Based on our revised estimates, the stock trades at 8.3x
FY12E and 5.8x FY13E earnings. RoE will continue to
be below 10% until new facilities and CRAMS contracts
ramp up. We maintain Neutral rating with a target price
of INR63 (8x FY13E EPS).
Sector view
India is on the threshold of a significant opportunity in
the contract manufacturing space. We expect increased
outsourcing from India as it offers a unique proposition
of low costs coupled with chemistry and regulatory
skills.
High entry barriers will ensure that the top 6-7 players
will command a disproportionate share of this
opportunity.
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