DISHMAN PHARAMACEUTICALS & CHEMICALS

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Aldous Henderson
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1 DISHMAN PHARAMACEUTICALS & CHEMICALS HOLD CMP: Rs Date: Nov 21, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM(%) PAT Margin(%) ROE(%) ROCE(%) P/BV(x) P/E(x) Key Data: Sector Pharma Face Value Rs wk. High/Low Rs /Rs Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer Target Price: Rs Market Cap.: Rs mn. SYNOPSIS Dishman Pharmaceutical & Chemicals Ltd is a globally-focused company, involved in the manufacture of APIs (active pharmaceutical ingredients), API intermediates, quaternary compounds and fine chemicals. The contribution from the Top 5 clients during Q2FY10 is around 35% as compared to 42% during Q2FY09. The company is in advance stage for the negotiation of contracts worth Euro mn comprises of 30 molecules with around 6-7 companies. Company expects revenue worth US$10mn in FY11E from its Hypo facility at Bavla. As on September 09, the inventory is around Rs2610mn, receivables are Rs 2090mn. Acquisition of Solvay by Abbott is a long term positive for the company as Abbott is a much bigger company than Solvay. Dishman Japan which was loss making entity is expected to be Profit neutral by this year end. The disinfectant formulation business is expected to achieve revenues worth Rs.2000mn in next three years. The topline of the company is expected to grow at a CAGR of 16% over FY08 to FY11E. Share Holding Pattern: 1

2 Investment Highlights Result Updates (Q2 FY10) During Q2FY10, Dishman Pharmaceuticals (Dishman) recorded a 15% YoY de-growth in net sales due to a dismal performance in both, CRAMs and Marketable Molecules segments. The company s total CRAMs business (74% of sales vs. 70% of sales) continued to de-grow at 9% YoY (8% YoY drop in Q1FY10) as revenues from Solvay declined significantly. Carbogen Amcis (44% of sales vs. 43% of sales), which reported a growth of 23% YoY in Q1FY10, disappointed this quarter with a 12 % de-growth YoY. This is the second quarter in the last 14 quarters in which Dishman has reported a drop in revenues YoY. The outlook, however, is set to improve from H2FY10, especially from Q4FY10 onwards. Historically, revenue growth for the company has been skewed in favour of the last quarter; the contribution of the first quarter is 21-22% of full-year revenues whereas that of the last quarter is at 28-30%. Dishman s EBITDA margins expanded 207bps YoY to 23% on account of improvement in gross margins (up 599bps YoY) and lower other expenses (down 175 bps YoY). Staff costs, however, increased 4% YoY (568bps) and other expenses 2% YoY (100bps). Consequently, EBITDA dropped 6% YoY during the quarter. Approves Rs 350 mn investment plan Dishman Pharmaceuticals & Chemicals has approved a proposal to invest around Rs 350 million into a formulation facility at the company`s Bavla plant in its meeting held on Mar 30, Purpose of this formulation facility is to become a full service provider as a CRAM Company. The company will invest around Rs 350 million from cash accruals to create this US FDA and MHRA approvable facility. Inks pact with Polpharma Dishman Pharma -India and Polpharma -Poland have signed a cooperation and joint API development agreement. Polpharma is a strong player in its home market and a leader in the Central and Eastern European markets and CIS countries with a turnover of Canadian (CA) USD 400 million. Expand Operations The global pharmaceutical services provider will see significant expansion of its capabilities and offerings this year, with the addition of a high-potency facility near 2

3 Dishman s headquarters in the district of Ahmadabad and a new plant in Shanghai, China. Plans to pump in Rs 2 billion Dishman Pharmaceuticals has plans to pump in Rs 2 billion for a Common Effluent Treatment (CET) plant at Bavla-Bagodara road near Ahmadabad in Gujarat. The effluents for the plant will be provided by the chemical units of company`s special economic zones (SEZ). Revenue Breakup Company Profile Dishman Pharmaceutical & Chemicals Ltd is a globally-focused company, involved in the manufacture of APIs (active pharmaceutical ingredients), API intermediates, quaternary compounds and fine chemicals. Headquartered in Ahmadabad, India, Dishman has exports spanning all continents. Dishman is a quality conscious, fast growing, and R&D intensive organization with a progressive approach. Their continuous progress has been achieved through the skills of their workforce, commitment to new technologies and dedication to good customer service. 3

4 Since 1998, Dishman has diversified its interests to contract research and manufacture sector. Within a short span of 5 years, Dishman has achieved several contract research and manufacturing projects and is all set to emerge as India s leading CMO organization (Contract Manufacturing Outsourcing). Dishman is already established as a respected and preferred outsourcing partner to various pharma majors. Subsidiaries Dishman USA Inc. Dishman Europe Ltd Dishman International Trading (Shanghai) Co.Ltd Dishman FZE Dishman Switzerland Dishman Pharmaceuticals & Chemical (Shanghai) Co.Ltd Dishman Pharma Solutia AG Dishman Infrastructure Ltd Carbogen Amcis (India) Ltd Dishman Japan Ltd Joint Ventures CAD Middle East Pharmaceutical Industries Schutz Dishman Bio-tech Ltd Business Areas Dishman s business model is classified into two segments CRAMS and Marketable Molecule (MM). Under CRAMS it offers contract research and manufacturing services for the bulk drugs and intermediates and MM segment offers services related to Quats, Specialty chemicals and intermediates. 4

5 Dishman CRAMS MM Solvay MNC S CA Vitamin Quats APIs Ch APIs Peer Group Comparison Name of the company CMP(Rs.) (As on Nov 21, 2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend(%) Dishman Pharma Sun Pharma Cipla Dr Reddys Laboratories Key Concerns Competition from other Indian companies operating in similar segments. Competition from countries that offers low cost manufacturing base such as China, Korea and Taiwan. The patent/license holder may abandon the New Chemical Entities (NCE) at any stage due to various reasons. Business revenues skewed towards Europe, though the share of USA market of Dishman is increasing now. 5

6 Financials 12 Months Ended Profit & Loss Account (Consolidated) Value(Rs.in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales 8, , Other Income Total Income 8, , Expenditure -6, , Operating Profit 2, , Interest Gross Profit 1, , Depreciation Profit before Tax 1, , Tax Profit after Tax 1, , Extraordinary Items Net Profit 1, , Equity Capital Reserves 5, , , , Face Value Total No. of Shares EPS

7 Quarterly Ended Profit & Loss Account (Consolidated) Value(Rs.in million) 31-Mar Jun Sep Dec-09E 3m 3m 3m 3m Description Net Sales Other Income Total Income 3, Expenditure -2, Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Exceptional Items Net Profit Equity Capital Face Value Total No. of Shares EPS E=Estimated 7

8 Charts 1) Net Sales & PAT Chart 2) P/E Chart 3) EV/EBIDTA Chart 4) P/BV Chart 8

1 Year Comparative Graph DISHMAN PHARMA BSE SENSEX Outlook and Conclusion At the current market price of Rs.216.00 the stock is trading at a P/Ex of 12.50x for FY10E and 10.20x for FY11E.

9 1 Year Comparative Graph DISHMAN PHARMA BSE SENSEX Outlook and Conclusion At the current market price of Rs the stock is trading at a P/Ex of 12.50x for FY10E and 10.20x for FY11E. The EPS of the stock is expected to be at Rs and Rs for FY10E and FY11E respectively. On the basis of price to book value, the stock trades at 1.26x and 1.12x for FY10E and FY11E respectively. AstraZeneca (AZ) contract for Omeprazole intermediates and API will commence from July onwards. Management expects this product to generate incremental revenue of US$10mn from FY10E onwards. Supply of Eprosartan intermediates to Solvay will be normalizing from Q3FY10E onwards. China facility is almost ready for commercialization and MNCs like AZ and J&J are keen to start projects. 9

10 Forward contract of US$12mn (Rs48-49/USD) for FY10E, which is 50% of net ex exposure. Capex cycle almost complete- Rs1bn in FY09 and Rs m in FY10E and FY11E. The company is in advance stage for the negotiation of contracts worth Euro mn comprises of 30 molecules with around 6-7 companies. In talks with Novartis for the development of 3-4 oncology molecules in Carbogen Amcis. Dishman has expanded its client exposure to key global pharma majors like Astra- Zeneca, Sanofi Aventis, GSK, J&J, Merck, Nippon Gosai, Novartis, Pfizer, Sanofi Aventis and Sepracor. Company also expects higher contribution of contract research business (Rs mn vs. Rs550mn in FY09) from Indian operation and plans to enter into generic APIs. During the quarter, company has been able to add newer contracts from companies like Novartis and AstraZeneca in high margins oncology segment. The company has also transferred Rs98.8mn in Foreign currency monetary item translation difference account and this will be amortized over next two years depending upon currency movement. The recent acquisition of Carbogen Amcis (CA) business, setting up of a QUATs facility in China, diverse customer base and strengthening of international presence will boost the company's performance with greater revenue and earnings momentum. The company s total CRAMs business (74% of sales vs. 70% of sales) continued to degrow at 9% YoY (8% YoY drop in Q1FY10) as revenues from Solvay declined significantly. Carbogen Amcis (44% of sales vs. 43% of sales), which reported a growth of 23% YoY in Q1FY10, disappointed this quarter with a 12 % de-growth YoY. We recommend a HOLD on the stock with a target price of Rs Industry Overview The Indian Pharmaceutical Industry (IPI) today is in the front rank of India s science-base industries with wide ranging capabilities in the complex field of drug manufacture and technology. 10

11 Accounting for two percent of the world's pharmaceutical market, the Indian pharmaceutical sector has an estimated market value of about US $8 billion. It's at 4th rank in terms of total pharmaceutical production and 13th in terms of value. It is growing at an average rate of 7.2 % and is expected to grow to US $ 12 billion by From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. Over the last two years the pharmaceutical market value has increased to about US $ 355 million because of the launch of new products. According to an estimate, 3900 new generic products have been launched in the past two years. These have been by and large launched by big brands in the pharma sector. And in the year 2005 Indian pharmaceutical companies captured around 70% of the domestic market. With the Product Patent Act, which came into action in January 2005, this industry is able to attract big MNCs to India. Earlier these big firms had apprehensions in launching new drugs in the Indian market. As in the present scenario, only a few people can afford costly drugs, which have increased price sensitivity in the pharmaceutical market. Now the companies are trying to capture the market by introducing high quality and low price medicines and drugs. At present, a large number of Indian pharmaceuticals companies are looking for tie-ups with foreign firms for in-license drugs. Contract research and pharmaceutical outsourcing are the new avenues in the pharmaceutical market. Contract manufacturing is growing at a very fast pace and is estimated to grow to US $30billion, whereas contract research is estimated to reach US$6-10 billion. Indian multinational companies like Dr.Reddy's Lab, Cipla, Ranbaxy, Wockhardt etc have created awareness about the Indian market prospects in the international pharmaceutical market. Approvals given by Foods and Drugs Administration (FDA) and ANDA (Abbreviated New Drug Application)/DMF (Drug Master File) have played an important role in making India a cost-effective and high quality product manufacturer. Furthermore, the changes that took place in the patent law, change of process patent to product patent, have helped in reducing the risk of loss for intellectual property. The changing dynamics of the global pharmaceutical industry especially that of the regulated markets like USA and Europe have presented a number of opportunities for IPI to capitalize on. Some of the major concerns facing the global pharmaceutical 11

12 industry are higher healthcare costs, competition from generics, patent expiries of blockbuster drugs, drying R&D pipelines and increasing R&D costs. These translate into a significant growth opportunity for IPI in the form of exports of generics to regulated markets and contract manufacturing/ research for global pharmaceutical companies. The investment in R&D is also on the rise as it has become important for Indian companies to start innovating new drugs in order to ensure long term sustainable growth and remain competitive at the global level. Indian companies have invested in New Chemical Entity (NCE) research and are scouting for global partners for pursuing collaborative research. The availability of large patient base, skilled manpower and lower costs of carrying out clinical trials has made India a favorable destination for R&D outsourcing. Industry Strengths: Capital Investment in Technology: Owing to the availability of advanced technology at low costs, the companies can produce drugs at lower costs. Cost Effective: The filing cost of ANDAS and DMFs is comparatively low for the Indian companies. Manpower: There is a large pool of technical experts available at modest salaries. Contract Research & Contract Manufacturing: There is a good scope for contract research and contract manufacturing. Infrastructure: There is a well-developed infrastructure for the pharmaceutical industry. Generic Drugs: In the last few years, the generic drug-manufacturing segment has received huge investments, in the process making it more competitive and efficient. 12

13 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 13

14 Firstcall India Equity Research: B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Auto Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com 14

Aurobindo Pharma Ltd

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