Dishman: gains from manufacturing

ANALYSTS' CORNER

Edelweiss Capital has recommended a value buy for Dishman Pharma at Rs 689. It adds that the company will benefit from contract manufacturing. The global market size for contract manufacturing is about $10-15 billion, growing at 5-6 per cent per annum.

But it has high entry barriers and a long gestation period. It further says, "Indian companies have been investing in this space and we believe India will soon be a key centre with its natural cost advantage, chemistry skills, and increased credibility.

Moreover, the company is placing its bets on R&D, with contract research leading to future manufacturing contracts. Given the pressure on innovators to cut costs and the long lead time taken to ink a manufacturing deal, we believe there is high probability that innovators will deal with their research partners for manufacturing as well.

The dual chemistry/ manufacturing capabilities provide a competitive edge to Dishman. The stock trades at 15.6x FY06E and 8.0x FY08E earnings.

Ranbaxy Labs: Earnings estimates at risk

Citigroup Research retains its sell rating on Ranbaxy. The earnings estimates for the company have been cut by 24-26 per cent for FY05 and FY06. They had indicated after the Q2 results, there was significant risk to their estimates.

The report adds, "We analysed results for global generic companies concluding that pricing environment could deteriorate further. Moreover, level of discounting in some of the European countries is higher than what was earlier envisaged. Growth in India has been slow and despite a recovery that is possible post-monsoon, overall momentum for FY05 looks below average. Ranbaxy has said it is looking at inorganic routes to grow its business, which is not factored in our estimates. We would highlight that they will have to raise debt to fund such plans and it may be difficult to find a great deal at this time."

Matrix Labs: Vertical integration

Quantum Securities recommends a hold at Rs 191 for Matrix Laboratories, with a target price of Rs 232. The report points out that over the last six months the company has made significant efforts to integrate vertically.

From being actively involved in research to cost-competitive procurement of drug intermediates, tapping formulation production and ending with a front-end market penetration strategy, Matrix has encompassed the entire spectrum of the pharma value chain.

It adds, "Matrix has its path cut out. To be vertically integrated is the mantra for survival. The fragmented industry needs consolidation and size is critical. The company now has four key aspects of the pharma business compared with a position of one-product active pharmaceutical ingredient (API) player, a little under two years ago. But in its quest to conquer the spectrum of pharma production, we believe Matrix has gone a couple of steps overboard."