Sell Dishman Pharma - Motilal Oswal

Dishman's 3QFY11 performance was significantly below our expectations. It reported a muted 4.3% YoY growth in revenue to Rs2.32b (v/s our estimate of Rs2.35b) while adjusted PAT declined 95% YoY to Rs17m (v/s our estimate of Rs209m), led by poor operational performance, and increase in depreciation and interest charges.

CRAMS revenue declined 1.6% YoY to Rs1.58b (68% contribution to revenue) due to 16.1% YoY drop in the CRAMS revenue from India. MM business revenue reported 19.5% YoY growth to Rs736m, led by 29.9% YoY growth in Vitamin-D business.

EBITDA declined 51% YoY to Rs253m while EBITDA margin contracted by 12.2 percentage points to 10.9% due to operating loss of Rs30.4m for CA. The local management of CA executed low-margin contracts to achieve topline target, resulting in poor profitability.

Adjusted profit declined 94.6% YoY to Rs17m owing to poor operational performance, increase in depreciation charges due to ongoing capex, and higher interest cost on account of working capital borrowings.

Outlook and view: The macro environment for the CRAMS business remains favorable, given India's inherent cost advantage and chemistry skills. We believe that Dishman's India operations will benefit from increased outsourcing from India, given its strengthening MNC relations. However, the adverse business environment for CA and Euro depreciation will continue to impact earnings growth in FY11 and FY12. We expect revenue CAGR of 8.4%, EBITDA CAGR of 2.3% and earnings CAGR of -14.6% over FY10-13. The stock currently trades at 15.7x FY11E, 25.8x FY12E and 13.2x FY13E earnings. RoE will continue to be below 10% till new facilities and CRAMS contracts ramp up. We downgrade our rating from Neutral to Sell, with a revised target price of Rs89 (10x FY13E EPS).

Source : Equity Bulls

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