Dishman Pharmaceuticals is leveraging its relationships and growing its global reach to capture a share of the contract manufacturing market.
Despite concerns on the impact of a slowdown in outsourcing, strong growth in the contract manufacturing business will help Dishman Pharmaceuticals grow at 25 per cent over the next few years. Contract manufacturing brings in about 70 per cent of the company’s revenues and Dishman has been expanding its capacities and expertise to improve its revenues.
CRAMS growth
Contract manufacturing revenues for Dishman are largely driven by two entities in Europe–Switzerland-based Carbogen Amcis (subsidiary) and Solvay Pharma to which it supplies Eposartan Mesylate (EM), an API used in making anti-hypertension medication. These companies will continue to contribute about half of the company’s revenues going ahead. In fact, it is the company’s Swiss subsidiary, Carbogen, which will operate Asia’s largest facility to manufacture cancer drugs at its Rs 50 crore Bavla plant in Gujarat.
APIs manufactured here will be supplied by Carbogen to its customers in Europe. This facility is likely to be operational by Q2, CY2009 and is expected to generate about $20-25 million (Rs 90-Rs 115 crore) in the first year. The company is also banking on supply of about 14 APIs to Astra Zeneca and estimates that the value of the orders in FY09 and FY10 will be about $10 million and $25 million, respectively.
Chemicals business
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Dishman’s other business segment is marketable molecules, which includes bulk drugs, intermediates, quats (quaternary compounds or catalysts, used to transfer a reactant from one phase to another in pharmaceutical and other industries) and specialty chemicals. The proportion of these relatively lower margin bulk drugs (2-3 per cent lower than CRAMS) and speciality chemicals to total turnover has been coming down over the years and currently accounts for about 40 per cent from about half in FY05.
Even in this category, the company is now focussing on value-added products such as high value quats, which find specialised applications in car batteries and energy saving processes. Its initiatives on this front and moving the production of low value quats to China have improved margins in the segment to about 18 per cent in Q2, FY09 from about 10 per cent in the last fiscal.
Beyond Europe
Thanks to the contribution from Carbogen Amcis and Solvay businesses, Europe accounts for 80 per cent of overseas sales while the US accounts for only 5 per cent. The company expects the contribution from the US to move to about 15 per cent over the next three years. Dishman has an expenditure plan of Rs 150 crore for the current fiscal, which will be used to fund a greenfield unit in China to manufacture low value quats, expand its Carbogen Amcis facility and meet working capital requirements for supply of APIs.
| ON THE GROWTH TRACK | |||
| Rs crore | FY08 | FY09E | FY10E |
| Sales | 803.1 | 1,050.00 | 1,218.00 |
| EBIDTA | 152.0 | 241.5 | 268.0 |
| Net Profit | 59.6 | 131.3 | 152.3 |
| EPS (Rs) | 14.7 | 16.1 | 18.7 |
| P/E (x) | 10.5 | 9.6 | 8.3 |
| E: Estimates | |||
The company is also aggressively looking at expanding into Saudi Arabia through a JV, while investing in a marketing network in Australia and Japan. While the Saudi Arabian and Australian ventures will look at the manufacture and marketing of disinfectants and sanitisation products, the company expects its Japanese venture to boost its sales of APIs. Dishman expects its disinfectants business to generate about Rs 20 crore in FY10.
Slowdown?
The concern area for the company is the slowdown on outsourcing contracts. The squeeze on private equity funding, which sustains many of the smaller biotech players in Europe, might impact revenues of Carbogen Amcis. The company management, however, says that outsourcing contracts of smaller biotech players account for less than 25 per cent of Carbogen’s revenues and so far it has not faced any issues on that front.
While it will not stop or postpone its ongoing projects, the tightness in the credit markets means that the company is likely to put a lid on its inorganic initiatives and instead try to expand production at its existing units. Moreover, it’s two SEZs, (one each for pharmaceutical and engineering) in Gujarat being built at a cost of Rs 500 crore are, however, likely to get delayed as the company focuses on its CRAMS and market expansion priorities.
Investment rationale
Unlike companies which have raised money through the FCCB route and are in a spot of bother due to payment obligations, Dishman has already converted 95 per cent of its $50 million FCCBs into equity shares over the last two fiscals. While the company has debt of about Rs 700 crore, it expects to repay this through robust cash flows from its core CRAMS operations.
Dishman’s revenues have grown by a healthy 35 per cent y-o-y in the second quarter to Rs 252 crore. EBIDTA margins, however, were down by 190 bps y-o-y to Rs 50 crore due to higher one-time costs such as repairs and maintenance at Carbogen to the tune of 300,000 Swiss Francs and the addition of Solvay’s Vitamin B3 business (1 million Swiss Francs), which was acquired in 2007. Mark-to-market forex losses of about Rs 31 crore have also dented net profits to Rs 2.8 crore in the September quarter from Rs 28 crore last year, which included Rs 10 crore of forex gains.
Going ahead, the company expects its initiatives in China, Japan, Australia and West Asia to help it maintain growth. An investment in the stock, which at Rs 155, is trading at about 9.63 times its FY09 EPS of Rs 17 (historic range about 14-22x forward earnings) should fetch about 25 per cent returns in the next one year.