Dishman Pharmaceuticals & Chemicals Ltd(DPCL)

-CRAMS to drive growth

Content Index

•DPCL Limited – Investment Snapshot :- Slide #3

• Pharma Industry – An Overview:- Slide #5

• Investment Arguments :- Slide #20

•P&L - Slide #30

• Balance Sheet :- Slide #31

Dishman Pharmaceuticals & Chemicals Ltd - Investment Snapshot (as on Jan 10, 2017)

Recommendation :- BUY

Maximum Portfolio Allocation :- 5%

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 50%

Current Accumulation Range :- 250-255Rs

DPCL is our typical Multibagger stock, but a Stock which is a

Good Investment under current Market conditions. It has a

presence in a space which offers enormous potential and is also

trading at reasonable valuations which will deliver superior

returns in the long run.

Core Investment Thesis :

The company was established in 1983 as a manufacturer of

Quaternary compounds (quats) and later transformed into a full-

fledged CRAMS partner for global pharma innovators. Currently,

it has a global presence with manufacturing sites in Europe, India

and China which are approved by recognised health authorities.

Current Market Price – Rs.252.00

Current Dividend Yield – 0.79%

Bloomberg Code –DISH. IN

BSE / NSE Code -532526/DISHMAN

Market Cap (In Rs. Cr) - 3531

Equity Share Capital [Cr]– 16.14

Face Value – Rs.2

52 Week High / Low – Rs.268.80/

Rs.127.95

Pro oter’s Holdi g – 61.40%

Other Holdings - 38.60%

Industry Opportunity & Potential

- An Overview

Global Pharma Industry

•The pharmaceuticals industry is one of the largest industries in the world and comprises companies that are

involved in the development, production and marketing of pharmaceutical products.

• The global pharma industries continued growth has been driven by factors such as an increase in elderly

populations and a growing middle class in emerging economies that have boosted the demand for

pharmaceuticals.

•The increased focus by governments to improve healthcare infrastructure that provide people with greater

access to treatment and medication has also contributed to the growth in the global pharmaceuticals

industry.

• According to IMS Health, the size of the global pharmaceuticals market is expected to grow at a CAGR of

approximately 4.7% between 2014 and 2019, to reach sales of approximately US$1,334.2 billion by 2019,

compared with US$1,060.7 billion in 2014.

Indian Pharma Industry

•According to CRISIL Research dated June 2015, the Indian pharmaceuticals market is estimated to be worth

US$36.8 billion in revenues for the fiscal year 2015.

• The Indian pharmaceuticals market can be broadly classified into the domestic and export segments in

terms of the target geographical sales markets.

•The Indian pharma industry has recorded strong growth in the back of high demand with nearly 80% of

spending on drugs is borne out-of-pocket by patients and nearly 90% of drugs sold are generics, for drugs

which treat acute diseases apart from increased demand for generics in developed continents such as US

and Europe, which has lead to increased exports of formulations and bulk drugs.

Indian Pharma Sector-Summary

Indian Pharma Sector- Advantage

Indian Pharma Structure

Indian Pharma Segments

Indian Pharma Segments - By Value

•The Anti-infective drugs command the largest share (16 per cent) in the Indian pharma market while the

cardiovascular segment represents 13 per cent of the market share; its contribution is likely to rise due to

the growing number of cardiac cases in India.

• The Gastro-intestinal contributes around 11 per cent of the total value of pharma industry in India. With

increasing number of research in gastroenterology, segment is going to grow at significant pace in coming

years.

•The Top five segments continue to contribute nearly 57 per cent to the total drugs consumption.

• In FY15, anti-infectives grew at 22 per cent, gastrointestinal at 23.4 per cent, pain & analgesics at 16.5 per

cent, cardiovascular at 19.1 per cent, anti- diabetic grew at 32.9 per cent, respiratory segment grew at 27.8

per cent, derma market grew by 19.2 per cent and urology by 29.5 per cent.

Generic Drugs

• With 70 per cent of market share (in terms of revenues), generic drugs form the largest segment of the

Indian pharmaceutical sector.

• India supply 20 per cent of global generic medicines market exports in terms of volume, making the

country the largest provider of generic medicines globally and expected to expand even further in coming

years

•The Over the Counter (OTC) medicines and patented drugs constitute 21 per cent and 9 per cent,

respectively, of total market revenues of USD20 billion.

Patented vs Generic Drugs

•The share of generic drugs is expected to continue increasing; it could represent about 85 per cent of the

prescription drug market by 2016.

•The Domestic generic drug market is expected to reach USD27.9 billion in 2020.Due to their competence in

generic drugs, growth in this market offers a great opportunity for Indian firms.

•Generic drug market is expected to grow in the next few years, with many drugs going off-patent in the US

and other countries.

Acute and Chronic segments

•The Indian domestic formulation market can further be divided into the acute and chronic segments. The

chronic drugs segment, which includes therapy areas such as anti-diabetics, respiratory, cardiac and central

nervous system CNS therapy has grown significantly. The anti-diabetic, respiratory, cardiac therapy and

CNS areas have grown at a CAGR of 21.1%, 11.4%, 13.3% and 12.8% respectively between fiscal year 2011

and fiscal year 2015. The share of chronic therapies in the overall spend on pharmaceutical products in India

has increased from 27.6% in 2010 to 30.5% in 2014, according to IMS.

•Whilst therapy areas in the chronic drugs segment continue to grow rapidly, acute therapies still comprise a

healthy share of the domestic market, as there remains high demand in the anti-infectives therapy area,

which is expected to grow at a CAGR of 8.9% between 2014 and 2019.

Health Insurance Penetration

•The Penetration of health insurance is expected to more than Population with health cover* ( In Million)

double by 2020. Around 439.5 million population has been covered by 2014.

• Increasing penetration of health insurance is likely to be driven by government-sponsored initiatives such

as RSBY and ESIC. Government-sponsored programmes expected to provide coverage to nearly 380 million

people by 2020.

•Private insurance coverage would increase nearly 15 per cent annually till 2020. In FY15, 27 per cent of the

total population has been covered under government sponsored health insurance. Increase in private sector

insurance would play an important role in affordability for high cost.

schemes

Bulk Drugs Exports

•The India's bulk drug exports are estimated to have grown to nearly US$12.9 billion in revenues fiscal year

2014-15 and are expected to increase at a CAGR of between 10% and 12% from fiscal year 2014-15 to fiscal

year 2019- 20, exceeding US$20.0 billion in revenues, according to CRISIL Research dated June 2015. This

growth will be driven by the recovery of the slowdown in bulk drug exports that occurred in 2013 to 2014,

leading to increased demand for both on-patent and off-patent drugs.

• Bulk drug exports to generic, off-patent regulated markets are seen as a key growth driver. Significant

patent expiries, together with the pro-ge eri environment in the US and Europe, are expected to drive

demand for Indian generic drug formulations.

•The gradual improvement in generic formulation approvals for off-patent lo k uster drugs is expected to

drive demand for off-patent drugs, while more outsourcing of API manufacturing by global pharmaceutical

companies could drive the demand for on-patent drug API sales. India continues to be the preferred sourcing

hub for global pharmaceutical companies, and a rising number of Drug Master Files DMFs , together with

the low-cost structure and the superior process chemistry skills of manufacturers in India, is contributing to

improving growth prospects.

Formulation Exports

•The Formulations exports grew at a CAGR of approximately 18% in the period from 2009 to 2014. In 2013 to

2014, formulations exports to semi-regulated markets grew at nearly 12%, compared to the regulated

markets, which recorded 10% growth.

• Indian formulations exports are expected to grow at a CAGR between 11% and 13% between financial

years 2015 and 2020, to nearly US$20.0 billion in revenues.

•The Exports to regulated markets are expected to increase at a CAGR between 12% and 14% for the same

period, driven by the expanding penetration of India generic products along with the improving pace of

product approvals. Exports to semi-regulated markets are expected to grow at a CAGR between 10% and

12%. I dia’s low cost base, well-developed API industry and similarity in disease profiles will be key growth

drivers of exports to the semi-regulated markets.

Porters Five Forces

Cost Efficiency

DPCL – Investment Arguments

Company Snapshot

•DPCL was established in 1983 as a manufacturer of Quaternary compounds (quats) and later transformed

into a full-fledged CRAMS partner for global pharma innovators.

• DPCL has a global presence with manufacturing sites in Europe, India and China which are approved by

recognised health authorities.

•DPCL operations are grouped under two major segments: (a) CRAMS and (b) Marketable Molecules. The

company offers end-to-end services through its integrated business model which runs through process

research and development to late stage clinical and commercial manufacturing.

•DPCL marketable molecule business deals in phase transfer catalysts, vitamin D, vitamin D analogues,

cholesterol, laolin related products, antiseptic and disinfectant formulations for pharmaceutical, cosmetic

and related markets. It recently forayed into high quality supply of generic APIs and intermediates for the

pharmaceutical industry.

CRAMS Segment

Order Book

•DPCL has an stable order book of $150mn with bulk being in Carbogen amcis($100mn) with oncology being

key focus area. This order book gives stable revenue visibility over next few years.

• DPCL has over 250 CRAMS projects under different phases out of which over 100 are in Phase 2 and 18 are

in phase 3 and the company expects one of the molecules to get commercialize in next six months.

•DPCL has enhanced its client base over last five years to reduce its dependence on major global innovators

i.e Large Pharma companies, the contribution of these innovators has fallen from 70-80% to 40% in FY16.

The top 5 clients include Novartis, Celgene, Abott, Mylan and Alco, these clients contribute 19% of DPCL’s

total business. DPCL is now concentrating on a large number of midsize bio-pharma companies rather than

on a few large MNCs.

CRAMS Business

•DPCL contract research and manufacturing services are the core of its business. It offers a portfolio of

services from process R&D, through kilo and pilot supply to full scale & commercial manufacture from

purpose built and dedicated facilities. It offers Process R&D with a specialization in developing processes

that are truly scalable through to commercialization, be this through Process Research, Process

Development or Optimization.

• DPCL due to the focused approach on CRAMS, strong execution capabilities, non-conflicting business

policies and state of the art facilities, the company is perceived as a strong partner and not as a competitor.

•DPCL’s CRAMS business contributes 71% of total revenue, we expect contribution from CRAMS to reach

74.5% by FY19E. CRAMS growth is mainly driven by DPCL’s India business as on revenue its contributes

17.2% with 50% EBITDA margin.

Global Presence

Preferred Global partner

Operational Efficiency - Margin Driver

•DPCL’s strategy of LOW VOLUME HIGH VALUE molecules have handsomely rewarded the company as it

has allowed the company to grow its profits faster than the revenues.

• DPCL’s Hi-Po facility is presently operating only at 55-60% utilization further these plants have margins

close to 45-50% margin due to their ability to manufacture High potency drugs. The higher utilization will be

driven by the recent Clovis deal which is expected to contribute to revenue from Q2 of FY18.

•DPCL’s China operations are yet to stabilize the facility is presently not approved with cGMP and operating

only at 15% capacity utilization, the approval of this facility will further drive profits as this facility also

supplies intermediaries to India operations.

Hi-PO Business - Gaining Traction

•DPCL is aiming to make the hi-potency business a critical element for growth. DPCL has set up a high potent

(Hi-po) facility, also known as unit 9, at its Bavla plant. This is a one of its kind facility not only in India, but in

the entire Asian sub–continent which is capable of handling extremely high potency molecules with a

specific focus on the therapeutic segments of oncology.

•DPCL management plans to shift majority of the business initiated by Carbogen in Switzerland to its Hi-Po

facility at Bavla in India for better cost synergies. Dish a ’s two cells are operated at near full capacity

utilization (peak revenue level of $15-20mn) and thus the company might activate the third cell of Hipo

facility to accommodate the increase in new projects. With this capacity addition through debottlenecking ,

the management expects a significant traction in Hi-Po business over next two years.

Stro g Retur Ratio’s

•DPCL’s RoE and RoCE have seen a gradual improvement, with ratios rising from 6.3% and 9.4% in FY12 to

12.7% and 14.7% in FY16, the company further expect these ratios to improve to 16.4% and 16.5% in FY19E

respectively on back of improvement in margins.

• DPCL’s debt levels of the company are expected to fall from Rs 8.4 bn in FY16 to over Rs 6.9 bn by FY19 next

three years as the major capex of the company is behind us and we think that the existing cash flows are

sufficient to fund the existing capex requirements.

•With plough back of profits in existing business the net debt to equity ratio is expected to fall from 0.5 in

FY16 to 0.2 by FY19E. The increasing utilization at Hi-Po facility and turnaround in Chinese operations will

further aid in improving ratio.

Consolidated P&L

Consolidated Balance Sheet

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