Stock Review: Dishman Pharmaceutical

Given Dishman Pharmaceutical's improved visibility of earnings, strong order book and low valuations, long-term investors can consider the stock

 

AHMEDABAD-BASED Dishman Pharmaceuticals & Chemicals is one of the leading players in the contract research and manufacturing services in India. Over the years, it has developed strong relationships with innovator companies in Europe, the US, China and India. It is present across the contract manufacturing value chain. Contract research includes research services provided to the innovator companies and contract manufacturing includes intermediate manufacturing services provide to these innovator companies.

GROWTH DRIVERS:

During the past few quarters, the financial performance of contract manufacturing companies was poor. But the environment for the contract manufacturing business remains favorable for Indian companies given their cost advantages and chemistry skills. According to an E&Y pharmaceutical report, India is rated as the most cost efficient country in the world. Indian contract manufacturing industry is expected to grow by 13% over the next three years. With its recent capital expenditure plans, Dishman seems to be ready to grab this opportunity. It recently received an order of $ 6 million from one of its new major European clients. Besides this, the company has an order pipeline to supply cardiovascular products to European and the US clients that it would execute over the next two years. In the past, its revenue fell due to a temporary suspension of supplies to its major client, Solvay, after the latter's merger with Abbott. Now the supplies to Solvay have resumed and they would pick up in the next fiscal. This should boost the company's revenue in the coming quarters.

   The company plans to start operations of its high-potency plant, plants that manufacture highly toxic intermediates for oncology, in Gujarat from January next year. Through this plant, the company would begin commercial supplies of contracts for two new clients. It would also commence operations of its high-potency plants and commercial synthetic plants in Shanghai, China from March next year.

FINANCIALS:

Dishman's numbers, in the past few quarters, were unimpressive due to poor performance of its Swiss subsidiary Carbogen AMCIS, depreciation of euro against rupee and delays in outsourcing contracts due to acquisitions among large pharma companies.

   First half of this fiscal was the worst in the past three years. Net sales of the company have gone down since March 2009. In the first half, net sales of the company were 414.7 crore against the net sales of 445.2 crore in the corresponding period last year. Due to the reduction in operating margin to 12% in the first half from 13%, net profit of the company declined by 12% to 55.5 crore. However considering the stability, the company showed in September quarter results, a turnaround in its financial performance can be expected from the December quarter.

   It has a history of healthy cash flows. Its return on capital employed has fallen due to heavy capital expenditure in the past few years. With the capital expenditure cycle almost coming to an end, the ratio may improve in future.

   Recently, the management has lowered its growth guidance to 10% from 15% for FY 11 due to the execution delays in the first half of the fiscal. The growth rate, however, is expected to increase in FY12 given the commencement of its hipotency plants and execution of delayed orders.

VALUATIONS:

Dishman is trading at a one year low price to earning multiple of 9.5 which is very low as compared to its other peers, Divi's Laboratories and Jubilant Life Science, which are trading at multiples of 19.4 and 11.3, respectively. The lower valuations and visibility of earning cashflows make Dishman pharma a good buy for medium to long-term investors.