Stock Fundamentals

Dishman Pharma: A healthy contract

Nalinakanthi V | Updated on January 16, 2018 Published on October 08, 2016

Growth prospects for this CRAMS player seem robust

Pharma stocks that were on a weak footing in the early part of the year are back in action. In the last three months, the BSE Healthcare Index has gained about 10 per cent. The stock of contract research and manufacturing services (CRAMS) player, Dishman Pharma, is among those that have managed to beat the benchmark convincingly.

The stock has gained nearly 40 per cent in less than six months and currently trades at about 12 times its 2017-18 estimated earnings, implying a 60 per cent discount to peer Biocon.

Despite the sharp rally, investors with a two to three-year horizon can buy the stock, given that the growth prospects continue to remain healthy.

The company’s contract research services and development arm, Switzerland-based Carbogen Amcis (CA), with a strong order book, is expected to support growth over the next 12 months. This subsidiary accounts for nearly 55 per cent of the company’s revenue. CA’s facility is currently operating at near full utilisation and the company is increasing capacity by investing about $4 million.

This should enable it to ramp up its research and development business. The segment’s operating profit margin expanded by 220 basis points in the June 2016 quarter to 19.9 per cent, thanks to the ‘higher margin’ commercial production work.

Awaiting regulatory nod

Dishman’s China facility is expected to be inspected by the US Food and Drug Administration this year. The trigger for this is believed to be a product filing by one of its clients. Currently, the facility largely supplies intermediates for which regulatory approval is not required.

But once the regulatory approval is in place, the facility can supply active pharma ingredients (APIs) to clients. The should help on two fronts: One, it will aid higher utilisation at the facility. Two, given that APIs enjoy better margin, the changing product mix will help rev up margins over the next two to three years.

India CRAMS segment (12 per cent of revenue) is also expected to contribute meaningfully to Dishman’s growth in the medium term. The company has nearly 15 molecules in the advanced phase of clinical trials. About two molecules are expected to be launched over the next two years.

Improving profitability

If approved, these molecules should add significantly to the company’s revenue and profits. Being innovative, the products enjoy very high operating profit margin. Also, the company has commenced high value commercial supplies of an innovative product and this has improved the segment’s margin by 700 basis points in the June 2016 quarter to 56.5 per cent. In addition to these, revenue flow from the company’s high margin oncology Hi-Po facility is also expected to aid revenue growth and overall profitability.

The company’s decision to focus on high value vitamin D analogues and cut down the channel (intermediaries) and bulk purchase of raw material at competitive prices has helped Dishman improve the segment’s profitability.

For instance, the operating profit margin for this segment has improved by 350 basis points to 34 per cent and this has in turn helped the company’s overall operating profit margin.

Dishman’s interest outgo has been declining steadily. First, the company has been gradually retiring its loans. It has also replaced high cost domestic debt with relatively cheaper foreign currency debt. During the June 2016 quarter, the company’s gross debt reduced by ₹20 crore.

Even as Dishman’s revenue declined about 9 per cent during the June 2016 quarter on account of a high base last year for India CRAMS business and consolidation in vitamin D business, its profitability increased steadily.

Overall operating profit margin has expanded by 200 basis points in the June 2016 quarter to 29.1 per cent.

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