Dishman Pharma - Global slowdown affects results - Centrum

We have reduced the target price of Dishman Pharma (DPCL) from Rs130 to Rs83 due to lower revenue growth in Q1FY14. The company's revenues were below our expectations. However, EBIDTA and net profit were in line. Despite the sharp fall in share price in the recent past, we believe the stock will get re-rated due to the following major developments: fresh order from AstraZeneca, 100% increase in high margin HiPo capacity, improvement in vitamin D margins, better performance of Carbogen Amcis (CA) and commencement of generic API business. These are likely to improve the company's performance from Q3FY14. We have revised our EPS estimates downward for FY14 and FY15 by 4% and 7% respectively and brought the target price down to Rs83 from Rs130 (based on 5x FY15 EPS of Rs16.5).

Revenue declines: DPCL reported 3%YoY decline in revenues from Rs3.16bn to Rs3.07bn in Q1FY14. The company's CRAMS business (70% of revenues) grew by 9%YoY from Rs1.97bn to Rs2.14bn. Its other business (30% of revenues) declined by 22%YoY from Rs1,183mn to Rs922mn. The other business constitutes vitamin D, quats and generic API. In the CRAMS segment, Carbogen Amcis (CA) reported 13%YoY revenue growth from Rs1.33bn to Rs1.51bn.

Margin improves: DPCL's margin for Q1FY14 improved by 110bps from 26.8% to 27.9% due to the reduction in material cost and other expenses. Its material cost declined by 200bps from 26.6% to 24.6% of revenues due to higher sales of CRAMS. Personnel cost grew by 290bps from 27.2% to 30.1% due to annual increments. Other expenses declined by 200bps from 19.4% to 17.4% of revenues.

Major risks: DPCL faces major risks from the global slowdown and reduction in R & D budgets of MNC pharma companies. The company's manufacturing facilities are approved by various regulatory agencies including US FDA and MHRA UK and hence it runs regulatory risk of non-compliance of its manufacturing facilities. Moreover, it runs the risk of delay in delivery schedules due to infrastructure issues. The company also faces risks from high attrition level of scientists. It faces currency risks as Rs5.0bn of its loans are in foreign currency.

Valuations: We expect DPCL to report moderate revenue growth with the improvement in the business environment. We expect margin improvement after restarting its vitamin D facility at Netherlands. At the CMP of Rs47, DPCL trades at 3.3x FY14E EPS of Rs14.2 and 2.8x FY15E EPS of Rs16.5. We have a Buy rating for the scrip. We have revised the target price to Rs83 from Rs130 in view of the decline in revenues during Q1FY14. Our target price is based on 5xFY15E EPS of Rs16.5 with a 75.6% upside from CMP.

Source : Equity Bulls

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