Dishman Pharma: Dishing out profits

Even as large cap pharma majors saw their stock prices tumble in the last one year, thanks to the regulatory tangle, the stock of contract research and manufacturing company Dishman Pharma has bucked the trend. Dishman Pharma’s stock has nearly doubled in the past year, thanks to the steady improvement in the company’s performance. From the 8-10x valuation band it used to trade four years back, the stock has been re-rated significantly and now trades at about 13 times its two-year forward earnings. However, given the healthy growth potential over the next two years, the stock’s current valuation may be justified.

Investors with a two-year perspective can buy the stock.

In the nine months ended December 2015, despite a flat revenue growth, Dishman Pharma recorded a sharp increase in profitability. Thanks to the management’s decision to sharpen focus on profitability by scaling down low-margin products, operating profit margin has improved by 6 percentage points to 28 per cent. This coupled with lower interest outgo, helped the company report a 49 per cent jump in net profit to ₹121 crore for the first three quarters of the fiscal, compared with the same period last year.

Revenue to improve Over the next two years, Dishman’s revenue and profitability are expected to improve on five counts. For one, the company’s operations in China, which turned profitable at the operating level last fiscal, are expected to improve, with a steady rise in utilisation levels. The China facility currently manufactures intermediates for its contract research and development subsidiary Switzerland-based Carbogen Amcis AG (CA); the company expects GMP certification for the facility this year. Post-successful completion of the inspection, active pharma ingredient (API) supplies can commence from the China facility to third parties.

Two, Carbogen Amcis AG has a strong order book of about $100 million, which is expected to be executed over the next 12 months. This should add to Dishman’s consolidated revenues.

With the CA business already operating at a 95 per cent utilisation, the company plans to increase its development capacity with an investment of $4-5 million. This should help the company strengthen its pipeline over the medium term.

Three, the company’s CRAMS business in India is expected to see healthy pick-up over the next two-three years. About 17 innovative molecules, for which Dishman is the CRAMS partner, are believed to be in phase III trials. At least a third is expected to be commercially launched over the next two to three years. These being innovative molecules, the operating profit margins are expected to be over 40 per cent. However, delay in approval of these innovative drugs, is a risk.

Reaching out directly Four, the company’s efforts to pivot the distribution model for its Netherlands cholesterol business has paid off. Earlier, the company used to reach customers through distributors. But now, the company sells directly to its customers and this has helped improve realisation and margins. Also, the company is selective about the clients and does not want to sell below a threshold double digit margin. While this has led to a moderation in the revenue growth, it has boosted its overall consolidated operating profit margin.

Finally, over the last two years, the company has been steadily retiring its long-term loan. The management expects to repay ₹150-200 crore in the current fiscal. Lower interest outgo due to loan repayment, should also aid Dishman’s consolidated profit.

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