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Dishman Pharma: Making a strong comeback - Views on News from Equitymaster

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Dishman Pharma: Making a strong comeback
Feb 19, 2009

Performance summary
  • Revenues grow by 36% YoY in 3QFY09, led by the robust performances of both its CRAMS and MM businesses.
  • EBDITA margins expand substantially by 6% due to a considerable fall in the raw material and staff costs (as percentage of sales).
  • PAT grows by 24% YoY and is lower than the 78% YoY growth in operating profits due to lower forex gains, higher depreciation and tax expenses.


Financial performance: A snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 2,072 2,822 36.2% 5,623 7,740 37.6%
Expenditure 1,668 2,102 26.0% 4,532 5,820 28.4%
Operating profit (EBIDTA) 404 719 78.1% 1,092 1,920 75.9%
Operating profit margin (%) 19.5% 25.5% 19.4% 24.8%
Other income 21 0 52 59 14.6%
Interest 77 101 31.6% 209 281 34.0%
Depreciation 104 170 63.1% 305 454 49.0%
Profit before tax 244 448 84.0% 629 1,245 97.8%
Extraordinary item 98 49 -50.2% 259 (425)
Tax 22 100 354.2% 71 115 60.7%
Profit after tax/ (loss) 320 397 24.3% 817  704 -13.8%
Net profit margin (%) 15.4% 14.1% 14.5% 9.1%
No. of shares (m) 77.5 80.7
Diluted earnings per share (Rs)* 13.7
P/E ratio (x)* 7.7
(* on a trailing 12-month basis)

What has driven performance in 3QFY09?
  • Dishman’s topline during the quarter grew by 36% YoY led by the robust performances of both its CRAMS and marketable molecules (MM) businesses. Growth in CRAMS (up 23% YoY) was largely driven by the contract with Solvay and other MNCs. Sharp depreciation of the rupee against the dollar was also instrumental in augmenting total revenues. The MM business witnessed an impressive 114% YoY growth due to an improvement in realisations and strong performance of the Vitamin D business acquired from Solvay. However, because Solvay has undertaken inventory rationalisation of its product ‘Teveten’, which Dishman is supplying, supplies will be impacted during the fourth quarter. Despite this, Dishman is confident of clocking topline growth of 30% plus for FY09. The scenario is expected to normalize from the first quarter of FY10.

    Revenue break-up
    3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    CRAMS 1,550 1,904 22.8% 4,217 5,661 34.2%
    (% of total sales) 75.0% 67.5% 75.2% 73.5%
    Marketable molecules (MM) 429 916 113.5% 1,308 2,037 55.8%
    (% of total sales) 20.8% 32.5% 23.3% 26.5%
    Others 87 - 87 -
    (% of total sales) 4.2% 0.0% 1.5% 0.0%
    Total 2,066 2,820 36.5% 5,611 7,699 37.2%

  • Dishman’s operating margins substantially improved by 6% due to the fall in raw material and staff costs (as percentage of sales). As a result, despite performing poorly in the second quarter, operating margins for the nine month period increased by 5.4% to 24.8%.

  • The bottomline grew by 24% YoY and was lower than the 78% YoY growth in operating profits due to lower forex gains, higher depreciation and tax expenses. Excluding the impact of forex gains, net profits grew by 57% YoY. For the nine-month period profits declined by 14% YoY and were largely impacted by the forex losses incurred as against forex gains in 9mFY08. Excluding this impact, net profits for 9mFY09 grew by an impressive 103% YoY.

What to expect?
At the current price of Rs 122, the stock is trading at a multiple of 5.9 times our estimated FY11 earnings. Going forward, the company intends to reduce its dependence on the Solvay contract by signing contracts with new clients. The management envisages the current slowdown in the global economy as a positive indicator which will further bolster the case for outsourcing manufacturing and clinical work to India thereby benefitting companies such as Dishman. The company has signed two major contracts with Solvay the value of which is 30 m euros. Further, Dishman is in talks with a Japanese company for securing a project, while 2 major contracts bagged by Carbogen Amcis will start in FY10. However, currency fluctuations are likely to impact the bottomline given that the majority of its debt is foreign currency denominated. Overall we maintain our positive view on the stock.

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