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.

Stock Views on Bharti Airtel, Dishman Pharma, Godrej Consumer

Emkay Global on Bharti Airtel - Target of Rs 952

Emkay Global Financial Services has recommended a buy rating on Bharti Airtel with a price target of Rs 952 in its report.

"Street has raised concerns on large equity issuance (57%) and subsequent EPS dilution of 8-10% in FY10/FY11 (post consolidation of 49% in MTN) which has resulted in stock price correction of 11-12%. We believe that Bharti would offer MTN, an economic interest (equity participation) of 25% in the form of 15% direct stake in Bharti Airtel and remaining through the parent resulting in equity dilution in Bharti Airtel being limited to 38% and EPS dilution to just 4.6% and 1.6% for FY10E and FY11 v/s 8-10% estimated by the street assuming 58% equity dilution. With lower EPS dilution than that expected by street, together with strong long term positives and synergies arriving out of the deal, we continue to rate 'BUY' on Bharti Airtel with target price Rs 952. We recommend investors to use the current overhang as an opportunity to buy into the stock," says Emkay Global Financial Services' report.

Hem Securities on Dishman Pharma - Target of Rs 230

Hem Securities has recommended a buy rating on Dishman Pharmaceuticals & Chemicals with price target of Rs 230 in its research report.

"The company is a leader in CRAM business amongst the largest Indian pharmaceutical companies. Moreover, in global crisis and weak economy outlook, the company performance for the financial year ended March 2009 is quite strong. Though promoters have pledged 10.60% share of their holding and 6.44% of total equity capital, the company seems to continue its growth momentum through its high revenue generating base business and seems to be extremely attractive investment opportunity in the Indian Pharmaceutical space."

"Presently, the stock is trading at Rs 184.35 which is at 10.14 times to its earnings of FY09 of Rs 18.18 and 2.65 times to its book value of Rs 69.59. Since the stock offers good investment opportunity, we ini-tiate a ‘BUY’ signal on the stock with a target price of Rs 230 in medium to long term investment horizon expecting an appreciation of about 25% from the current level of Rs 184.35," says Hem's research report."

Sharekhan on Godrej Consumer - Target of Rs 185

Sharekhan has maintained its buy rating on Godrej Consumer Products, GCPL with a target of Rs 185 in its research report.

"We believe the deal is taking place at attractive valuations for GCPL considering that the same will expand the limited product portfolio of GCPL, improve the growth profile of GSL’s products and result in higher EPS for GCPL’s shareholders. At the current market price of Rs 176 the stock trades at 19.3x its FY2010 earnings and 17.1x its FY2011 earnings (excluding GSL’s financials). We maintain our price target at Rs 185, as we await further information from the management on GSL’s operations. However, the earnings accretive nature of the deal could potentially result in a 4-5% increase in the price target to Rs 192-195. We maintain our 'Buy' recommendation on the stock," says Sharekhan's research report."