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Dishman: CRAMS woes continue - Views on News from Equitymaster

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Dishman: CRAMS woes continue
Mar 4, 2011

Dishman Pharma announced its 3QFY11 results. The company reported 6% YoY growth in sales and 95% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 6% YoY during 3QFY11 largely led by the marketable molecules (MM) business as revenues from the CRAMS business decline.
  • EBDITA margins plunge 11% to 13.2% during the quarter primarily due to a considerable rise in raw material costs (as percentage of sales).
  • Poor performance at the operating level coupled with higher interest costs and depreciation charges weighs heavy on the bottomline which declines by 95% YoY.


Financial performance: A snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 2,255 2,379 5.5% 6,920 6,833 -1.3%
Expenditure 1,710 2,064 20.7% 5,132 5,397 5.2%
Operating profit (EBIDTA) 545 315 -42.2% 1,788 1,436 -19.7%
Operating profit margin (%) 24.2% 13.2%   25.8% 21.0%  
Interest 85 133 56.4% 288 311 8.1%
Depreciation 141 171 21.5% 459 500 8.9%
Profit before tax 319 10 -96.7% 1,041 625 -40.0%
Tax (6) (7) 11.2% 75 41 -46.3%
Exceptional items 5 (1)   (4) (12)  
Profit after tax/ (loss) 331 17 -94.7% 962 572 -40.5%
Net profit margin (%) 14.7% 0.7%   13.9% 8.4%  
No. of shares (m)       80.7 80.7  
Diluted earnings per share (Rs)*         9.8  
P/E ratio (x)*         9.1  
(* on a trailing 12-month basis)

What has driven performance in 3QFY11?
  • Dishman's topline during 3QFY11 grew by 5.5% YoY and was largely due to the 19.5% YoY growth in the marketable molecules (MM) business. The CRAMS business performed poorly during the quarter as revenues fell by 2% YoY. The custom manufacturing business was largely impacted by the weak performance of Carbogen Amcis. The global economic slowdown has taken 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. Not just that, there were some issues at the top management level at Carbogen which also led to the poor performance of the business.

    Revenue break-up
      3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    CRAMS 1,607 1,582 -1.6% 4,907 4,617 -5.9%
    (% of total sales) 72.3% 68.3%   73.5% 71.4%  
    PBIT margins 18.7% 5.4%   21.2% 15.4%  
    Marketable molecules (MM) 616 736 19.5% 1,767 1,848 4.6%
    (% of total sales) 27.7% 31.7%   26.5% 28.6%  
    PBIT margins 16.9% 8.0%   16.4% 12.1%  
    Total 2,223 2,318 4.3% 6,674 6,464 -3.1%

  • Dishman's operating margins plunged 11% to 13.2% during the quarter due to a substantial rise in raw material costs (as percentage of sales). Raw material costs increased from 26.2% of sales in 3QFY10 to 35.2% in 3QFY11. As far as the PBIT margins of the business segments are concerned, that of the CRAMS business crashed from 18.7% in 3QFY10 to 5.4% in 3QFY11. Margins of the MM business also declined from 16.9% in 3QFY10 to 8% in 3QFY11.

  • Poor performance at the operating level coupled with higher interest costs and depreciation charges weighed heavy on the bottomline which declined by 95% YoY.

What to expect?
At the current price of Rs 97, the stock is trading at a multiple of 6.2 times our estimated FY13 earnings. Dishman's problems in the past few quarters have largely been compounded by the deteriorating performance at Carbogen Amcis. Although the global scenario for CRAMS has been subdued, Carbogen has also been hampered by an inefficient management at the helm of affairs. This has resulted in considerable erosion of sales and profitability of the business. The management intends to go in for a serious restructuring of that business. The process will start taking place in FY12 and the benefits from the same are expected to flow in from FY13. Performance meanwhile is expected to remain subdued in FY11. Due to the company's lukewarm performance we were compelled to revise our estimates over the next three years which also led to a reduction in target price.

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