Dishman Pharma - Margins Disappoint; Result Update Q2FY15 :: Edelweiss

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Dishman Pharmaceuticals Ltd (DPCL) reported a topline of INR 399.1 cr for Q2FY15, which was 10.0% above our estimate of INR 362.5 cr, mainly on the back of higher sales from Carbogen Amcis. Also, margin in the Vitamin D business remained at 20%+ levels for the second consecutive quarter. However, the company’s overall margin continued to be adversely impacted by subdued margin in CA and Quats businesses. Still, we believe there would be a favorable impact on the company’s overall operating margin in FY15E, as the China facility is expected to achieve break-even. Along with EBITDA margin improvement, the management continues to guide for a revenue growth target of 10-15% for FY15E. Further, DPCL remains committed to the overall reduction in debt and negligible capex. We continue to believe that there are enough triggers in place to drive future growth in DPCL, but the current stock price discounts most of them.

Revenue growth above estimate led by CA

DPCL’s topline in the quarter jumped mainly on the back of higher-than-expected growth in Carbogen Amcis (19.6% YoY). The CRAMS business (India & CA) grew by 19.2% YoY but the MM business (ex-Vitamin D) reported 9.1% YoY drop in revenue. We believe that high-value contracts in the Hypo space from players like Novartis, Merck & AstraZeneca, ramp-ups in generic business and strong growth in the Vitamin D business (part of strategy to move up the value chain) will enable DPCL to drive its future revenue growth.

Vitamin D margin continues to show strength but CA margin remains stressed

DPCL’s margin in Q2FY15 contracted by 486bps YoY to 21.9%, lower than our estimate of 23.0%. Margin was impacted by lower margin at CA (16.3% versus an average of 17-18%; over what period) and Quats business (13.2% vs 17.9% YoY). However, the company has guided that margin at CA is expected to bounce back to normal levels. Overall margin was lower on account of a dip in gross margin and higher “Other Costs”. The company management expects margin for FY15 to improve from current levels on the back of higher margin in Vitamin D and break-even in the China facility.

Capex guidance reaffirmed; Focus stays on debt reduction

DPCL has reiterated its guidance on capex. The capex will work out to INR 60 cr each for FY15E and 16E. Further, the company has guided for a debt reduction of INR 75-100 cr each in FY15E & 16E. We continue to believe that the combined impact of improved margin and higher utilization of assets would help DPCL increase its return ratios going forward. The company also expects to grow its consolidated business at 10-15% while EBIDTA margin is expected to improve from the current levels by FY15-end.

LINK
https://www.edelweiss.in/research/Dishman-Pharma--Margins-Disappoint;-Result-Update-Q2FY15/10005215.html