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Dabur Pharma: Balanced growth

Nov 10, 2006

Introduction to results
Dabur Pharma announced robust results for the second quarter and half year ended September 2006. The company’s strong presence in the oncology segment in both India and the semi regulated or less regulated markets has led to the impressive growth in topline. Operating margins have also expanded, chiefly owing to a reduction in other expenditure (as a percentage of sales). All these factors put together have led to the bottomline growth outpacing the topline growth despite reduction in other income and higher interest costs.

Financial performance: A snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 732 978 33.6% 1,464 1,789 22.2%
Expenditure 674 878 30.2% 1,322 1,596 20.8%
Operating profit (EBIDTA) 58 100 71.9% 143 193 35.2%
Operating profit margin (%) 8.0% 10.3%   9.7% 10.8%  
Other income 15 11 -29.4% 18 19 5.5%
Interest 6 17 191.4% 14 28 107.7%
Depreciation 10 12 13.7% 19 23 19.7%
Profit before tax 57 82 43.6% 128 160 25.7%
Tax 9 12 31.8% 20 24 23.3%
Profit after tax/ (loss) 48 70 46.0% 108 136 26.1%
Net profit margin (%) 6.5% 7.1%   7.4% 7.6%  
No. of shares (m) 156.1 156.1   156.1 156.1  
Diluted earnings per share (Rs)*         1.4  
P/E ratio (x)*         52.1  
(* on a trailing 12-month basis)

What is the company’s business?
Dabur Pharma, incorporated in March 2003, is an associate company of Dabur India Limited. The company is a leading player in cancer research and anti-cancer products in India and the international markets and also markets a range of products in the cardiovascular, anti-diabetic and gynaecology segments in the domestic market. Dabur Pharma operates in the regulated markets namely US and Europe and in some other markets through its fully owned subsidiary – Dabur Oncology Plc. For R&D activities it uses the services of Dabur Research Foundation (DRF, which is an important research organisation recognised by the Department of Science and Technology, Government of India). The company’s R&D expenditure stood at 10% of sales in FY06.

What has driven performance in 2QFY07?
Oncology drives revenues: Dabur Pharma reported a robust 34% YoY growth in revenues driven by growth across all its business segments, namely oncology (68% of total revenues) and non-oncology (32% of total revenues). The company’s dominant position in the Indian market and its strong presence in the semi-regulated or less regulated markets in the oncology space was instrumental in propelling revenue growth. While Dabur Pharma has not given the segmental break-up between oncology and non-oncology (India-specific), we will not be able to comment in detail. Going forward, the US market is expected to start contributing to sales from 3QFY07 onwards, as the company has received its first ANDA approval for the anti-cancer drug ‘Carboplatin’. It is awaiting approvals for two more drugs, namely ‘Paclitaxel’ and ‘Irinotecan’ and plans to increase its ANDA filings as part of its tie-up with Hospira (a major player in the injectables space in the US market).

Margin improvement visible: Dabur Pharma’s operating margins improved by 230 basis points during the quarter mainly due to fall in other expenditure as a percentage of sales. Going forward, given the fact that Dabur Pharma’s contribution from its oncology formulations business in the international markets is expected to increase from 24% in FY06 to 55% in FY09, largely driven by the increasing scale of its US business, we expect operating margins to improve from 8.6% in FY06 to 15% in FY09.

Cost break-up
(% of sales) 2QFY06 2QFY07 1HFY06 1HFY07
Raw material cost 27.1% 28.9% 32.2% 31.4%
Purchase of finished goods 8.4% 6.6% 5.8% 6.1%
Staff cost 10.6% 10.9% 10.9% 11.4%
R&D expenditure 9.8% 9.7% 10.8% 12.4%
Other expenditure 36.1% 33.8% 30.7% 28.0%

Reflected in the bottomline: Strong topline growth coupled with improvement in operating margins has led to the 46% YoY growth in the bottomline. This growth is despite the 29% YoY reduction in other income and higher interest costs.

Quarterly trend
(%) 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07
Net sales growth 2.6% 25.1% 7.6% 10.8% 33.6%
Operating profit margin (%) 8.0% 13.3% 4.1% 11.4% 10.3%
Net profit growth (%) 6.7% 4.9% -96.6% 10.4% 46.0%

What to expect?
At the current price of Rs 74, the stock is trading at a price to earnings multiple of 15.3 times our estimated FY09 earnings. We believe that Dabur Pharma’s focus on oncology, which is a niche therapeutic area, will stand the company in good stead going forward. In the international markets, US is expected to be the critical growth driver for the company to bolster revenues from oncology generics, where the competition is relatively limited as compared to that in plain vanilla generics. Dabur Pharma has tied up with Hospira, which is a leading player in the injectables space, to introduce its oncology products in the US market. The company recently received its first ANDA approval for ‘Carboplatin’ and is awaiting approvals for two more products. Besides this, Dabur Pharma’s strong presence in India and the semi-regulated markets is expected to significantly gain traction in the future as well. We thus maintain our positive view on the stock.

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