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Dishman Pharma: The acquisition impact - Views on News from Equitymaster
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Dishman Pharma: The acquisition impact
Aug 2, 2007

Performance summary
  • Revenues grow by 105% YoY in 1QFY08, led by contribution from Carbogen Amcis, which Dishman had acquired in August 2006.

  • EBDITA margins contract by 760 basis points (7.6%) due to steep rise in the staff costs (as percentage of sales).

  • PAT records a much slower 14% YoY growth despite the higher other income. Sharp increase in interest costs and depreciation charges pare bottomline growth.

Financial performance: A snapshot
(Rs m) 1QFY07 1QFY08 Change
Net sales 818 1,680 105.3%
Expenditure 623 1,406 125.6%
Operating profit (EBIDTA) 195 274 40.4%
Operating profit margin (%) 23.9% 16.3%  
Other income 42 107 154.8%
Interest 7 61 737.4%
Depreciation 34 89 164.0%
Profit before tax 196 230 17.5%
Tax 8 16 95.5%
Profit after tax/ (loss) 188 214 14.0%
Net profit margin (%) 22.9% 12.7%  
No. of shares (m) 68.8 73.7  
Diluted earnings per share (Rs)*   12.8  
P/E ratio (x)*   24.4  
(* on a trailing 12-month basis)

What is the company’s business?
Dishman Pharmaceuticals is involved in the manufacture of APIs (active pharmaceutical ingredients), API intermediates, quaternary compounds and fine chemicals. The company’s initial focus was on QUATS (chemical substances, which find applications in the manufacture of bulk drugs, drug intermediates, speciality chemicals, polymers and resins), but it has now evolved into a significant player in the CRAMS (Contract Research and Manufacturing) space. In fact, while the contribution from the Marketable Molecules segment (includes QUATS) has reduced from 65% of total sales in FY03 to 28% in FY07, revenue share of CRAMS has scaled up from 35% in FY03 to 72% in FY07 (including the acquisition of Carbogen Amcis). In August 2006, Dishman acquired the Swiss based Carbogen Amcis (CAM) to lend a further fillip to its overall CRAMS business. Between FY03 and FY07, Dishman’s overall revenues and net profits have grown at compounded annual rates of 51% and 66% respectively.

What has driven performance in 1QFY08?
Impact of CAM: Dishman’s topline during the quarter grew by 105% YoY as the consolidated revenues reflected that of the acquired Swiss company Carbogen Amcis. The latter accounted for 47% of the total sales of Dishman and 31% of its profits. Excluding this acquisition, Dishman’s base business posted a staid 9% YoY growth in revenues. The company was impacted not only by the appreciation of the rupee against the dollar but also had to contend with a sharp appreciation of the Swiss Franc against the dollar. Going forward, Dishman expects the base business to grow at 30% as revenues from the 6 major contracts that it has signed (excluding CAM) ramp up.

Cost break-up
(% of sales) 1QFY07 1QFY08
Raw material cost 43.2% 42.3%
Staff cost 12.1% 29.6%
Other expenditure 20.8% 11.9%
Operating margins shrink: Dishman’s operating margins contracted by 760 basis points (7.6%) due to a steep rise in the staff costs (as percentage of sales). The rise in staff costs could be attributed to the integration of CAM’s staff with itself. Besides this, the rupee appreciation also played a part in denting margins to the extent of 3%.

Bottomline scenario: The bottomline growth at 14% YoY was much slower than the 40% YoY growth in operating profits due to higher interest costs and depreciation charges. This is despite the 155% YoY increase in other income.

What to expect?
At the current price of Rs 313, the stock is trading at a multiple of 12 times our estimated FY10 earnings. Going forward, the company intends to reduce its dependence on the Solvay contract by signing contracts with new clients. The company has already signed 6 contracts with global innovator companies, which is expected to ramp up revenues from its base CRAMS business.

The acquisition of CAM is also expected to enhance Dishman’s CRAMS business going forward. The former has a strong customer base among medium-sized pharmaceutical and biopharmaceutical companies with 99% of revenues coming from repeat customers. This indicates the company’s ability to enhance the value proposition for its clients (global innovator companies) given that CRAMS is typically a relationship based business. Dishman has envisaged driving synergies between the two companies by expanding the product range and renewing focus on key contracts, the aim being to serve the entire drug life cycle of 15 to 20 years. While we are positive on the growth prospects of the company from a long-term perspective, the stock at the current levels seems fairly valued.

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