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Dishman: 'Custom manufacturing' blues - Views on News from Equitymaster
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Dishman: 'Custom manufacturing' blues
Aug 3, 2009

Performance summary
  • Revenues grow by a mere 3% YoY as the company's CRAMS business takes a backseat.
  • EBDITA margins expand substantially by 7% due to a considerable fall in the raw material costs and other expenditure (as percentage of sales).
  • PAT grows by 41% YoY during the quarter bolstered by the strong performance at the operating level despite the absence of other income and higher tax expenses.


Financial performance: A snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 2,362 2,432 3.0%
Expenditure 1,860 1,745 -6.2%
Operating profit (EBIDTA) 502 687 36.9%
Operating profit margin (%) 21.2% 28.2%  
Other income 20 -  
Interest 93 104 11.9%
Depreciation 144 145 0.6%
Profit before tax 285 438 53.8%
Tax 8 46 507.4%
Profit after tax/ (loss) 277 392 41.4%
Net profit margin (%) 11.7% 16.1%  
No. of shares (m) 79.7 80.7  
Diluted earnings per share (Rs)*   19.6  
P/E ratio (x)*   9.7  
(* on a trailing 12-month basis)

What has driven performance in 1QFY10?
  • Dishman’s topline growth during 1QFY10 was subdued at 3% YoY largely due to lower sales from the Solvay contract during the quarter as compared to the corresponding quarter last year. As a result, revenues from the custom manufacturing business (CRAMS) declined by 8% YoY. Having said that, a 19% YoY growth in revenues reported by the acquired company Carbogen Amcis, restricted the fall in Dishman’s overall CRAMS business. Also, growth in overall revenues excluding Solvay stood at 23% YoY during the quarter. While the MM business witnessed a decent 11% YoY growth due to an improvement in realizations, sales of the Vitamin D business acquired from Solvay were flat. Overall, sales from the CRAMS business are expected to scale up going forward as revenues from various contracts signed with major global innovators start flowing in.

    Revenue break-up
      1QFY09 1QFY10 Change
    CRAMS 1,825 1,684 -7.7%
    (% of total sales) 77.4% 73.9%  
    Marketable molecules (MM) 534 594 11.2%
    (% of total sales) 22.6% 26.1%  
    Total 2,359 2,277 -3.5%

  • Dishman's operating margins substantially improved by 7% during the quarter due to the fall in raw material costs and other expenditure (as percentage of sales). While raw material costs dropped by 2% to 23.1%, other expenditure fell 7.2% to 18.2%. Further, what also contributed to the superior margin performance were higher revenues from the contract research business, which enjoy stronger margins as compared to the other businesses. As far as the PBIT margins of the business segments are concerned, while that of the CRAMS business improved from 15.8% in 1QFY09 to 23.3% in 1QFY10, the MM business witnessed a splendid improvement in margins from 13% in 1QFY09 to 25.3% in 1QFY10.

  • The strong performance at the operating level percolated down to the bottomline, which registered a healthy 41% YoY growth. This growth came about despite the absence of other income during the quarter and higher tax expenses.

What to expect?
At the current price of Rs 190, the stock is trading at a multiple of 9.3 times our estimated FY11 earnings. Going forward, the company intends to reduce its dependence on Solvay and has signed contracts with a variety of global innovators namely AstraZeneca, Novartis and GSK to bolster its CRAMS business. 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. 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, the company’s performance is subject to volatility on the forex front as the majority of its debt is foreign currency denominated. Overall, we maintain our positive view on the stock.

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