Dishman Pharma: Margins crimped

By acquiring new customers and also selling more to existing buyers, the Rs 803 crore Dishman Pharma has managed to grow its top line by a smart 39 per cent in FY08. That's way below the increase seen in FY07 of 109 per cent. Moreover, the March 2008 quarter saw a rise in revenues of just 18 per cent indicating that growth rates could taper off from last year's levels.

The drug company, which operates primarily in the contract research and manufacturing services (CRAMS) space, managed to leverage a bigger client base following the acquisition, in October 2007, of the fine chemicals and vitamin D analogues business of Solvay Pharmaceuticals. Today, Dishman's top five customers contribute about a third of its revenues. What's more, the Netherlands-based Solvay, its biggest buyer accounts for a lower 14 per cent of its top line compared with nearly 16 per cent in FY07.

The sharp appreciation of the rupee and higher raw material costs hurt operating profit margins (opm) which fell 90 basis points to 19 per cent in FY08. The CRAMS segment, which contributes just over 77 per cent of the firm's revenues, stayed profitable posting an opm of 21.6 per cent, a rise of 570 basis points. The low-margin marketable molecule business, however, saw a big fall in margins.

Dishman believes it should be able to turn in revenues of around Rs 1,050 crore"" a growth of nearly 31 per cent""and net profits could reach Rs 150 crore, a rise of 24 per cent, in FY09. The firm is in talks with several European and Japanese pharma players to whom it can supply active pharmaceutical ingredients and other intermediates.

Dishman's growth will be powered by orders for Eposartan Mesylate (anti-hypertensives ) from Solvay, for which it has added capacity at Bavla, Gujarat. At Rs 310, the stock trades at 16.6 times estimated FY 09 earnings and is attractively valued.