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Dishman Pharma: Global slowdown hits CRAMS - Views on News from Equitymaster
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Dishman Pharma: Global slowdown hits CRAMS
Dec 10, 2010

We recently had a conference call with the management of Dishman Pharma to understand the reason for the subdued performance of the company in the year so far. Here are the key takeaways:

Global CRAMS scenario: The global financial crisis and the consequent recession in the developed nations of the US and Europe took its toll on the outsourcing activities of global pharma majors. Many of them were scrambling to cut costs and chose to rationalize inventory rather than dole out any new orders. Further, most of the global innovators were merging with other companies given the dearth of new drugs in their pipelines as a result of which there was considerable uncertainty for Indian contract research and manufacturing (CRAMS) players. As a result, these companies saw their sales dip considerably. This included the likes of Piramal Healthcare, Dishman among others. Although the management of Dishman has stated that the orders are beginning to pick up, these have been more on the manufacturing side rather than the research side. The company also contends that a clearer picture will emerge by February 2011. That said, after two dismal years, the company expects sales and profits to grow by 15% each in FY12.

1HFY11 result performance: Dishman's performance was adversely impacted in FY10 on account of the global economic slowdown and the unwillingness of pharma majors to outsource more orders. In that year, sales and profits declined by 14% YoY and 20% YoY respectively. The performance in FY11 so far has also been not much to write home about, although it has been a tad better than what was witnessed in the last fiscal. In 1HFY11, sales and profits declined by 5% YoY and 12% YoY respectively. The culprit once again has been the CRAMS business which accounts for a significant chunk of its revenues. Carbogen Amcis, in particular (a Swiss company acquired by Dishman) has failed to set the cash registers ringing and Dishman expects revenues from this company to remain flat for FY11. Same is the case with the MM (marketable molecules) business, which is also expected to witness a flat growth this year.

Sales and profit growth: Dishman's management expects sales and profits to grow by 15% each in FY12, while performance will remain subdued in FY11. We have factored in this subdued growth for FY11 in our estimates, but expect it to recover over the next 2 years as orders start picking up and outsourcing gains momentum.

Capex plans: Dishman has outlined capex to the tune of Rs 1.5 bn for FY11 and Rs 1 bn for FY12 for setting up plants most of which will be funded through internal accruals.

What to expect?

At the current price of Rs 135, the stock is trading at a price to earnings multiple of 8.6 times our estimated FY13 earnings. The company's performance in the year so far has been below our estimates largely on account of the subdued environment abroad. As a result, we have been compelled to considerably lower our estimates for the company for the full year. Meanwhile, Dishman's stock price has also taken a severe beating on account of its lackluster performance in recent times.

Thus, due to the downgrade in our estimates, our target price for the company has been lowered to Rs 190 per share. This implies a compounded return of 15% from a 2-3 year perspective.

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