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Dishman: Turnaround at Carbogen? - Views on News from Equitymaster

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Dishman: Turnaround at Carbogen?
Apr 4, 2012

Dishman Pharma has announced the third quarter results of financial year 2011-2012 (3QFY12). The company reported 12% YoY growth in sales and a net profit of Rs 167 m. Here is our analysis of the results.

Performance summary
  • Revenues grow by 12% YoY during 3QFY12 largely led by the marketable molecules (MM) and the vitamin D businesses as growth in the contract research and manufacturing (CRAMS) business remains lukewarm.
  • EBDITA margins substantially rise by 9.9% to 23.1% during the quarter primarily due to a fall in all cost heads (as percentage of sales).
  • Strong performance at the operating level percolates down to the bottomline ensuring that the company reports net profit of Rs 167 m as against Rs 17 m in 3QFY11.

(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 2,379 2,662 11.9% 6,833 7,740 13.3%
Expenditure 2,064 2,047 -0.8% 5,397 6,345 17.6%
Operating profit (EBIDTA) 315 615 95.4% 1,436 1,395 -2.8%
Operating profit margin (%) 13.2% 23.1%   21.0% 18.0%  
Interest 133 164 22.9% 311 452 45.3%
Depreciation 171 191 11.8% 500 585 16.9%
Profit before tax 10 260 2397.6% 625 359 -42.5%
Tax (7) 93   41 103 154.8%
Profit after tax/ (loss) 17 167 857.5% 584 255 -56.3%
Net profit margin (%) 0.7% 6.3%   8.5% 3.3%  
No. of shares (m)       80.7 80.7  
Diluted earnings per share (Rs)*         6.0  
P/E ratio (x)*         8.5  
(* on a trailing 12-month basis)

What has driven performance in 3QFY12?
  • Dishman's topline during 3QFY12 grew by 12% YoY and was largely due to the 31% YoY growth in ‘others' which includes the marketable molecules (MM) and vitamin D businesses. What helped the robust growth in the MM business was the launch of the product ‘benzethonium chloride'.

  • The CRAMS business continued to report a tepid performance as revenues grew by 7% YoY during the quarter. However, there was a turnaround in the performance of Carbogen Amcis, which over the last many quarters had done poorly. The Dishman management had been putting corrective measures into place and this has begun to deliver results. Further, Carbogen was able to bag an order of a newly launched product from the company Escalar, revenues from which are expected to flow in from 2013. The Indian CRAMS business, however, did not do too well during the quarter.

    Revenue break-up
      3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    CRAMS 1,582 1,691 6.9% 4,617 4,967 7.6%
    (% of total sales) 68.3% 63.7%   71.4% 64.3%  
    PBIT margins 5.4% 21.7%   15.4% 9.7%  
    Others 736 963 30.9% 1,848 2,752 48.9%
    (% of total sales) 31.7% 36.3%   28.6% 35.7%  
    PBIT margins 8.0% 5.8%   12.1% 11.9%  
    Total 2,318 2,655 14.5% 6,464 7,719 19.4%

  • Dishman's operating margins substantially improved by 9.9% to 23.1% during the quarter due to a fall in all cost heads (as percentage of sales). Raw material costs decreased from 35.2% of sales in 3QFY11 to 32.3% in 3QFY12. As far as the PBIT margins of the business segments are concerned, these rose significantly for the CRAMS business. Healthy performance at the operating level percolated down to the bottomline as a result of which the company reported net profits of Rs 167 m as against a profit of Rs 17 m in 3QFY11. It must be noted that the company is looking to sell its Chinese operations started earlier, the proceeds from which will be used to reduce debt.

What to expect?
At the current price of Rs 51, the stock is trading at a multiple of 4.1 times our estimated FY14 earnings. Dishman's problems in the past few quarters have largely been compounded by the deteriorating performance at Carbogen Amcis. In addition to the weak global environment, Carbogen has also been hampered by an inefficient management at the helm of affairs. This had resulted in considerable erosion of sales and profitability of the business, which in turn led to the company's stock price being badly battered. Dishman has revamped the management at Carbogen Amcis and because of the restructuring in that business, it managed to turnaround this quarter. After the results of the last quarter, we were compelled to revise our estimates for the company from an FY14 perspective to Rs 147. We maintain this view.

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