Dishman Pharma

This is the second stock in our coverage of Pharma Sector. Dishman Pharmaceuticals is engaged in the business of synthetic chemistry research. It has organized the business in two streams: QUATs (quarternary ammonium compounds) & APIs (Marketable Molecules or MM Segment), and Contract Research and Manufacturing (CRAM).

In October 2007, the Company acquired the fine chemicals, vitamin D and vitamin D analogues businesses of Solvay Pharmaceuticals BV (Solvay), based in the Netherlands. Currently, it has a contract manufacturing agreement with Solvay for developing three of its products. If these products materialize, then it would translate into a Rs 30-60 crore of additional profit for the company. According to BRICS Securities this means an addition of 14 to 15 per cent boost to the estimated FY11 profits.

In the CRAMs space it also has a joint venture with AstraZeneca. It is working on 14 drugs for the company. The substantial nature of this assignment can be gauged from the fact that in FY09 it has assigned another plant to meet the requirement thereof. Moreover, large MNC pharma companies have expressed interest in entering into manufacturing contracts going forward for its other plants. At the end of last quarter, the company came up with a plan to invest in Rs 35 crore for additional facilities in Bavla. The additional investments strengthen its commitment to becoming a serious player in the CRAM space.

By the middle of 2009 both its new plant at Bavla and in China will get commissioned, which will add to better visibility of the company in terms of earnings.

Likewise, the recent agreement with Europe-based Polpharma for co-operative and joint API development will also ensures additional contract research and manufacturing business flow for Dishman’s new facilities.

The bottom-line of the company is all set for some improvement as capacity utilization rises. EBITDA margin is likely to expand 600bps in FY09 as low yielding QUATs business reduces to 17% of sales in FY09E from 21% in FY08. Additionally, shifting operations of CarbogenAmcis to India will add an estimated 350bps to margins. BRICS Securities estimate that margin of 24% to sustain over the forecasted period as capacity utilization improves to 80% in FY11E from 65% in FY09E.

Valuation

Ever since it got listed on the bourses (April, 2004), till October 2008, Dishman traded between 25x to 15x forward earnings – often trading at higher-than-peer multiples on back of predictable growth. It currently trades at 5.6x FY10E – a steep discount to its historical trading range, 45% discount to the market, and 45% discount to peers like Divi’s Laboratories and Piramal Healthcare. This leaves quite a lot of room for potential upside in the near term, as the markets get corrected from the lower levels.