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Dishman: CRAMS continues to suffer - Views on News from Equitymaster

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Dishman: CRAMS continues to suffer

Dec 31, 2011

Dishman Pharma has announced the second quarter results of financial year 2011-2012 (2QFY12). The company reported 16% YoY growth in sales and a loss of Rs 63 at the net level. Here is our analysis of the results.

Performance summary
  • Revenues grow by 16% YoY during 2QFY12 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 plunge 13.9% to 10.7% during the quarter primarily due to a considerable rise in raw material costs and other expenditure (as percentage of sales).
  • Poor performance at the operating level coupled with higher interest costs and forex losses lead to a loss at the net level to the tune of Rs 63 m.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 2,331 2,697 15.7% 4,454 5,078 14.0%
Expenditure 1,759 2,409 37.0% 3,333 4,298 29.0%
Operating profit (EBIDTA) 572 288 -49.8% 1,121 780 -30.4%
Operating profit margin (%) 24.6% 10.7%   25.2% 15.4%  
Interest 95 150 57.5% 178 288 62.1%
Depreciation 168 207 23.2% 329 394 19.6%
Profit before tax 309 (70)   614 99 -83.9%
Tax 14 (7)   48 11 -77.7%
Profit after tax/ (loss) 295 (63)   567 88 -84.4%
Net profit margin (%) 12.7% -2.3%   12.7% 1.7%
No. of shares (m)       80.7 80.7  
Diluted earnings per share (Rs)*         4.1  
P/E ratio (x)*         9.0  
(* on a trailing 12-month basis)

What has driven performance in 2QFY12?
  • Dishman's topline during 2QFY12 grew by 16% YoY and was largely due to the 93% YoY growth in ‘others' which includes the marketable molecules and vitamin D businesses. The CRAMS business continued to report a tepid performance as revenues grew by 5% YoY during the quarter. As has been the case in the previous quarters, the custom manufacturing business has largely been impacted by the weak performance of Carbogen Amcis. The global economic slowdown has taken its toll on Carbogen as many small and medium sized pharma innovators and biotech firms withdrew early research projects in an attempt to cut down costs. Not just that, there were some issues at the top management level at Carbogen which also led to the poor performance of the business. Having said that, the Dishman management has been putting corrective measures into place and believes that Carbogen Amcis is at a turning point after which it should start delivering results. Further, Dishman has strengthened its partnership with Abbott by signing a contract of Euro 100 m for a period of 3 years for a few products for which it will be the sole supplier. This should lend the much needed fillip to the overall CRAMS business.

    Revenue break-up
      2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    CRAMS 1,608 1,688 5.0% 3,035 3,276 7.9%
    (% of total sales) 75.6% 62.7%   73.2% 64.7%  
    PBIT margins 22.1% 1.5%   20.6% 3.5%  
    Others 520 1,004 93.1% 1,112 1,788 60.8%
    (% of total sales) 24.4% 37.3%   26.8% 35.3%  
    PBIT margins 9.2% 5.5%   14.9% 15.1%  
    Total 2,128 2,692 26.5% 4,147 5,064 22.1%

  • Dishman's operating margins plunged 13.9% to 10.7% during the quarter due to a substantial rise in raw material costs and other expenditure (as percentage of sales). Raw material costs increased from 25.6% of sales in 2QFY11 to 36.2% in 2QFY12. The increase in other expenditure was largely due to forex losses of around Rs 260 m incurred by the c9ompany during the quarter. On excluding this, the drop in operating margins was restricted to 4.3%. As far as the PBIT margins of the business segments are concerned, both businesses saw a decline with the CRAMS suffering the most. As far as Carbogen is concerned, the management laid off 60 people and the cost savings from this move are expected to be visible from next quarter onwards.

  • Poor performance at the operating level coupled with forex losses and higher interest costs led to a loss at the net level to the tune of Rs 63 m. It must be noted that the company has reduced its stake in South Africa from 30% to 14% and it intends 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 37, the stock is trading at a multiple of 3 times our estimated FY14 earnings. Dishman's problems in the past few quarters have largely been compounded by the deteriorating performance at Carbogen Amcis. Although the global scenario for CRAMS has been subdued, Carbogen has also been hampered by an inefficient management at the helm of affairs. This has 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 restructuring is going on in that business, benefits from which are expected to flow in from FY13. Because of the company's poor performance over the past several quarters, we have been compelled to downgrade our estimates for the company and hence our target price for the company from an FY14 perspective now stands at Rs 147.

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