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Dishman: Global slowdown hits CRAMS

Feb 4, 2010

Performance summary
  • Revenues decline by 20% YoY during 3QFY10 as the company’s CRAMS and MM businesses take a backseat.
  • EBDITA margins fall by 3% to 24.2% during the quarter due to a rise in staff costs and other expenditure (as percentage of sales).
  • Decline in sales and operating profits has an impact on the bottomline as well which drops 18% YoY.

Financial performance: A snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 2,822 2,255 -20.1% 7,740 6,920 -10.6%
Expenditure 2,053 1,710 -16.7% 6,245 5,132 -17.8%
Operating profit (EBIDTA) 768 545 -29.1% 1,494 1,788 19.7%
Operating profit margin (%) 27.2% 24.2%   19.3% 25.8%  
Other income 0 -   59 -  
Interest 101 85 -15.5% 281 288 2.5%
Depreciation 170 141 -17.2% 454 459 1.3%
Profit before tax 497 319 -35.9% 819 1,041 27.1%
Tax 100 (6)   115 75 -34.2%
Profit after tax/ (loss) 397 325 -18.2% 704 966 37.1%
Net profit margin (%) 14.1% 14.4%   9.1% 14.0%  
No. of shares (m)       79.7 80.7  
Diluted earnings per share (Rs)*         21.4  
P/E ratio (x)*         9.6  
(* on a trailing 12-month basis)

What has driven performance in 3QFY10?
  • Dishman’s topline during 3QFY10 declined by 20% YoY largely due to the 16% YoY and 33% YoY decline in sales from its CRAMS and MM businesses respectively. The custom manufacturing business was largely impacted by the weak performance of Carbogen Amcis, which reported a 40% YoY drop in sales during the quarter. The global economic slowdown took its toll on Carbogen as many small and medium sized pharma innovators and biotech firms chose to withdraw early research projects in an attempt to cut down costs. As a result, 50% of the business from the US (a large market for Carbogen) witnessed shrinkage. The MM business also suffered during the quarter. Overall, while FY10 is expected to be a highly forgettable year for the company as far as the CRAMS business is concerned, sales are expected to scale up FY11 onwards as revenues from various contracts signed with major global innovators start flowing in.

    Revenue break-up
      3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    CRAMS 1,904 1,607 -15.6% 5,661 4,907 -13.3%
    (% of total sales) 67.5% 72.3%   73.5% 73.5%  
    Marketable molecules (MM) 916 616 -32.8% 2,037 1,767 -13.3%
    (% of total sales) 32.5% 27.7%   26.5% 26.5%  
    Total 2,820 2,223 -21.2% 7,699 6,674 -13.3%

  • Dishman’s operating margins reduced by 3% during the quarter due to the rise in staff costs and other expenditure (as percentage of sales). Staff costs increased from 24.8% of sales in 3QFY09 to 30% in 3QFY10, while other expenditure increased by 5% to 19.6% of sales in 3QFY10. Having said that, the nine month period had a different story to tell with operating margins improving by 6.5% to 25.8% in 9mFY10. As far as the PBIT margins of the business segments are concerned, that of the CRAMS business fell from 23.9% in 3QFY09 to 18.7% in 3QFY10, while the MM business reported an improvement in margins from 15.6% in 3QFY09 to 16.9% in 3QFY10. Again, the scenario was much better in 9mFY10 wherein PBIT margins of the CRAMS business expanded by 8.7% to 21.2%.

  • With both sales and operating profits falling down substantially, net profits also declined by 18% YoY during the quarter. This came about despite lower interest costs and depreciation charges. However, the fall in net profits was lower than that of the operating profits due to tax refund this quarter. For the nine month period, net profits grew by 37% YoY led by the 20% YoY growth in operating profits and lower tax expenses.

What to expect?
At the current price of Rs 206, the stock is trading at a multiple of 8.5 times our estimated FY12 earnings. Going forward, Dishman’s increasing focus on its CRAMS business is expected to play a significant role in boosting the company’s overall performance. The global economy slowing down is expected to strengthen the case for pharma outsourcing all the more as global innovators look to further prune costs, all of which will be beneficial to Dishman in the long term despite near term pressures. Besides increasing the scope of its contract with Solvay, other contracts entered into with some of the top global pharma innovators are also expected to add considerable value to Dishman’s business in terms of improving its product offerings and thereby bolstering its revenues. However, delay in the global recovery, exposure to significant currency fluctuations and a high debt equity ratio are the key risks to be kept in mind. Overall, we maintain our positive view on the stock from a long term perspective.

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