The Hindu Business Line : Dishman Pharma: Buy

Investors with two-year perspective can consider an investment in Dishman Pharmaceuticals and Chemicals, a leading contract research and manufacturing services (CRAMS) player catering exclusively to innovator companies. The company has high earnings visibility from long-term contracts for supply of pharmaceutical ingredients. Furthermore, inorganic growth through overseas acquisitions will add to Dishman’s revenues as it keeps looking for opportunities. Given its capabilities in manufacturing constituents of patented molecules, key intermediates and Vitamin D, Dishman is well-placed to capture a larger share in the innovator contracts space.

Dishman’s sales could easily clock a compounded annual growth rate of over 30 per cent over the next two-three years and maintain operating margins of 21 per cent. At the current price of Rs 275, the stock discounts its FY-09 earnings per share 14 times, which is cheap compared to the sector leader, Divi’s Laboratories.

Business profile

CRAMS contributed over 75 per cent of Dishman’s Rs 542-crore sales in the first nine months of FY-08 with half of that coming from subsidiary Carbogen Amcis. Dishman’s business model has two major segments — that of CRAMS and marketable molecules (key chemical intermediates). The company’s strategy of not competing with its customers, combined with a firm reputation on IP development and protection, allows it to establish a presence in the US/European markets.

Having inked supply contracts with over seven MNC companies for the long term, Dishman’s focus on bulk drugs and other intermediates lends strength to its legacy business. Quaternary compounds (50 per cent of revenues for the marketable molecule segment) are one of its strongest areas in its legacy business with Solvay as a key client.

However, the dependence on Solvay has been reduced from 80 per cent (2003) of turnover to less than 20 per cent in the recently-concluded December quarter, as other big clients have been roped in. Another area which holds promise is contract research. Acquisitions of companies such as Syprotec, Innovative Ozone Services (specialising in ozone chemistry skills) and Carbogen Amcis have given it the much-needed strength to carry out full-fledged contract research.

Multiple projects with Carbogen in the early, middle and later stages of innovative drug molecules and the consequent commercialisation could rake in a new revenue stream, shoring up the adjusted current profit margin of 16 per cent.

Key contracts

Dishman spent around 90 per cent of its total capex of Rs 400 crore in FY-07 to fund the acquisition of Carbogen Amcis. Players such as Dishman, which have no front-end presence, derive leverage through acquisitions. The company has a strong order-book and three plants were slated for commissioning from January.

Dishman has also recently concluded the acquisition of Vitamin D and Vitamin D analogues (a business with high-entry barriers) division in the Netherlands. It was already developing an intermediate of Vitamin D3 and, post-acquisition, it will enjoy vertical integration in a business, which enjoys high margins. It will retain production of cholesterol and Vitamin D analogues there but transfer the Vitamin D3 production to its Indian plants.

Risks

Below par performance from Carbogen and slower-than-expected uptake of CRAMS can hamper earnings significantly. Quarterly numbers may be volatile, given the lumpy nature of revenues from CRAMS. Nearly 90 per cent of Dishman’s revenues are denominated in forex (dollars and euro), which makes earnings vulnerable to fluctuation of currencies.

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