institutional equities dishman pharmaceuticals & chemicals · 2020-04-25 · institutional...

Institutional Equities

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Reuters: DISH.BO; Bloomberg: DISH IN

Dishman Pharmaceuticals & Chemicals

Well-crafted Business Model We initiate coverage on Dishman Pharmaceuticals and Chemicals (DPCL) with a Buy rating and a target price of Rs380. DPCL is primarily a contract research and manufacturing services (CRAMS) company which focuses on providing process development, scale-up and large-scale manufacturing of active pharmaceutical ingredients or APIs for supply to innovator pharmaceutical companies. Over the years, DPCL has built a robust business model which is capable of sustaining growth. 70% of DPCL’s revenues come from CRAMS and the rest from marketable molecules (vitamin D analogue, anti-cholesterol). CRAMS business is the growth driver and is structured in such a manner that 60%-65% of sales come from custom synthesis and 30%-35% from contract manufacturing. As custom synthesis feeds the contract manufacturing business, DPCL ensures that it continues to generate a healthy pipeline of contract manufacturing opportunities commensurate to the growing revenue base of manufacturing. We expect DPCL’s revenue and earnings over FY17E-FY19E to post 9% and 28% CAGR, respectively. Earnings growth will outpace revenue growth driven by improvement in the product mix, improvement in capacity utilisation and savings in financial costs. We have valued DPCL at par with its peer group companies in the CRAMS space, at 17.45x FY19E earnings.

Growth in CRAMS business: Over the past several years, DPCL has continuously strengthened its position in the CRAMS space. The client profile of DCPL is now well diversified, with top 10 clients contributing just 35% to its sales. With the ongoing addition of new clients every year, DPCL is in a very strong position to drive business growth in the CRAMS space. The key growth drivers for this segment are:

1. Strong Phase-3 custom synthesis pipeline which will culminate into high margin commercial manufacturing opportunities.

2. A growing client base helping the company to sustainably build a drug portfolio.

3. Windfall gains from contract manufacturing of API for an oncology product.

Low single-digit growth in Vitamin D analogues: Following commoditization and the pricing pressure faced by DPCL in the Vitamin D space, it has discontinued this business and plans to focus on Vitamin D analogues. The analogues have higher margin than commoditized Vitamin D business. Apart from Vitamin D, DPCL is building its presence in disinfectant business where it is gradually scaling up operations. The disinfectant business is expected to bring in revenues worth Rs1bn over the next three years.

Bottom-line growth to outpace top-line growth: We expect DPCL’s margins to expand 400bps by FY19 driven by improved capacity utilization, savings in financial costs and potential commercial manufacturing opportunity of API for a high-margin product. The company has given guidance that this drug has shown breakthrough benefit in ovarian cancer. We believe the drug is Niraparib (Zejula) that was recently approved by the US Food and Drug Administration.

Limited capex in future: DPCL is looking at annual capex of Rs1,800mn over the next two years. A large part of this capex is towards maintenance, while the rest is for installing an additional line at its HIPO manufacturing facility and custom modification and development of the building that it recently acquired for expanding custom synthesis business. Currently, DPCL has enough manufacturing capacity to add more products or expand production of its existing products. DPCL can look to incrementally generate revenues of about Rs3,000mn-Rs5,000mn through its existing capacity.

BUY

Sector: Pharmaceutical

CMP: Rs311

Target Price: Rs380

Upside: 22%

Vishal Manchanda Research Analyst [email protected] +91-97374-37148

Key Data

Current Shares O/S (mn) 161.4

Mkt Cap (Rsbn/US$mn) 50.1/779.9

52 Wk H / L (Rs) 347/128

Daily Vol. (3M NSE Avg.) 1,857,145

Shareholding (%) 3QFY17 2QFY17 1QFY17

Promoter 61.4 61.4 61.4

Public 38.6 38.6 38.6

Others - - -

One-Year Indexed Stock

Price Performance (%)

1 M 6 M 1 Yr

Dishman Pharma & Chem. 7.5 26.8 83.3

Nifty Index 1.4 7.9 18.5

Source: Bloomberg

Exhibit 1: Key Financials

Y/E March (Rsmn) FY15 FY16 FY17E FY18E FY19E

Net sales 15,887 15,961 15,571 16,970 18,581

EBITDA 3,127 4,103 4,253 5,043 6,003

Net profit 1,198 1,711 2,135 2,745 3,512

EPS (Rs) 15 21 13 17 22

EPS growth (%) 9.7 42.8 (37.6) 28.5 27.9

EBITDA margin (%) 19.7 25.7 27.3 29.7 32.3

P/E (x) 20.9 14.7 23.5 18.3 14.3

P/BV (x) 4.1 3.5 3.0 2.6 2.2

EV/EBITDA (x) 17.0 13.1 11.6 9.3 7.4

RoCE (%) 15.9 17.5 17.4 18.1 19.9

RoE (%) 9.7 11.8 12.8 14.2 15.4

Source: Company, Nirmal Bang Institutional Equities Research

60

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140

160

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200

May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

DISHMAN PHARMACEUTICALS AND CHEMICALS Nifty 50

2 May 2017


2 Dishman Pharmaceuticals & Chemicals

Company background

Headquartered in Ahmedabad, DPCL is a leading global outsourcing partner for the pharmaceutical industry. It offers a portfolio of development, scale-up and manufacturing services. The company’s product basket comprises APIs, high potent APIs, anti-cholesterol, Vitamin D, Lanolin-related products, Vitamin D analogues, phase transfer catalysts, antiseptic and disinfectant formulations and intermediates. DPCL ensures its global presence through manufacturing facilities in Europe, India and China. Starting off as a quats manufacturer, DPCL has now transformed itself into a leading CRAMS player with 70% of revenues flowing from that space and the remaining 30% revenues from marketable molecules. Over the years, the proportion of revenues from CRAMS business has risen steadily, from 64% in FY13 to 70% in FY16. Going forward, we expect CRAMS business to contribute a larger proportion of 75% in FY19. In case of marketable molecules, the share has been declining from 36% in FY13 to 30% in FY16 and is expected to contribute a smaller proportion at 25% of revenues in FY19.

Exhibit 2: Revenues (Rsmn) Exhibit 3: Revenue mix

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Key management personnel

Mr. Janmejay R. Vyas - Chairman and Managing Director: He has a bachelor's degree in chemistry from St. Xavier's College, Ahmedabad, and a bachelor's degree in pharmaceuticals & fine chemical technology from the University Department of Chemical Technology or UDCT, Mumbai. He served as a consultant to various pharmaceutical companies during 1974 to 1983. DPCL was promoted by him in 1983 and he has been managing the affairs since then. While establishing the company, his focus has been on research and developing various in-house technologies for quaternary ammonium compounds and APIs. He has been the head of the research and development division since 19 years. Mr. Arpit Vyas - Managing Director and Chief Financial Officer: He graduated from University of Aston, Birmingham, in chemical engineering in 2009. He also serves as a director of Schutz Dishman Biotech, Azafran Innovacion and Dishman Care. He has experience of handling marketing of various herbal cosmetic products of Azafran Innovacion. Mr. Mark Griffiths - Director and Global Chief Executive Officer: He has over 31 years of relevant industrial experience delivering high added value technical and operational solutions in the pharmaceutical and fine chemicals industry. Qualified as an engineer and having gained significant experience in the management of complex, multi-task, multi-input projects, he brings a cross-functional ability to anticipate and optimise technical, operational and management problems. Mr.Griffiths has designed, built and managed facilities ranging in function from research and development to manufacturing. He holds a master of science degree in engineering from Bristol University, UK.

12,722 13,853

15,887 15,961 15,324

16,723

18,334

13.2

8.9

14.7

0.5

(4.0)

9.1 9.6

(10)

(5)

0

5

10

15

20

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Revenue Growth Rate (%)

(%)(Rsmn)

64% 67% 70% 70% 72% 73% 75%

36% 33% 30% 30% 28% 27% 25%

0%

20%

40%

60%

80%

100%

120%


CRAMs MM



CRAMS – Industry overview

The CRAMS Industry can be divided into the following segments:

Discovery – This segment pertains to drug target identification and discovery of new chemical entities or NCEs which can work on a specific target.

Custom synthesis – This segment pertains to clinical supply of APIs and formulation of NCE / generic molecule.

Formulation development – This segment pertains to research and development in drug formulation.

Clinical development – This segment pertains to conducting clinical trials for the purpose of testing a given drug in humans and animals to understand its efficacy and safety profile at various doses.

Contract manufacturing – Once the drug is give a nod by the regulator, there are companies which provide large-scale manufacturing services to enable commercial supply of the drug.

As far as DPCL is concerned, its presence in CRAMS is limited to custom synthesis (API) and contract manufacturing (API). It has a marginal presence in formulation development.

What drives the custom synthesis and contract manufacturing market for APIs

Customs synthesis is a service available to companies for whom it is impractical to manufacture APIs in-house. This process is customised to satisfy the need of the customers – in terms of the molecule, quality and quantity. The customer may either provide the formula for the molecule or the manufacturer may have to develop a synthetic method to make it. Generally, the quantity varies between the range of a few milligrams to 10kg. In case of a higher quantity, the process to do so is called contract manufacturing. Large pharmaceutical companies outsource a portion of the development and manufacturing of intermediates and APIs to manage multiple internal priorities, access new technologies or additional capacity, and preserve needed capital or ensure multiple sources of supply. Many emerging pharmaceutical and generic drug companies outsource all process development and manufacturing, and larger pharmaceutical companies typically outsource the development and manufacturing.

Innovator API market: The US and Europe are the main destinations for generation of innovator drugs. These innovators prefer to outsource their custom development needs, so that they can focus on R&D and core competencies. The size of the market of outsourced APIs is about US$13bn-US$15bn. In case of commercial manufacturing, following capacity constraints and to achieve cost reduction, outsourcing is on the rise.

Generic API market: With a market size of US$11bn, the generic API market is a large, growing, fragmented and outsourcing market as most generic API manufacturers outsource their requirement. Despite price erosion, API volume is expected to rise with net global growth projected in mid-single digits. With the Generic Drug User Fee Act (GDUFA) legislation, acceleration in USFDA approval of ANDAs can be expected along with an increase in the inspection of foreign pharmaceutical facilities, especially in emerging markets.

India and China are the preferred locations for outsourcing mainly because they are able to manufacture APIs at a lower cost without compromising on quality.

Global R&D expenditure: Global R&D expenditure is expected to increase from US$139bn in 2014 to US$152bn in 2018 at a CAGR of 2.3%, of which 75% can be potentially outsourced so that innovator companies can focus on their core competencies and shift from a fixed cost to a variable cost model.

DPCL’s presence is in the CRAMS space

DPCL, which started off as a company manufacturing quaternary compounds (quats), has now evolved itself into a fully integrated CRAMS provider. The company is present across the entire value chain and offers services right from the initial stage of process research and development to the later stages of clinical and commercial manufacturing and supply. DPCL manufactures drug quantities required for conducting clinical trials by its clients. After the innovative molecules are approved, the company explores further possibility of large-scale commercial supply tie-ups. DPCL provides assistance to drug innovators for development and process optimization for novel drug molecules, which are in various stages of the development process. This business vertical mainly focuses on the therapeutic segment - oncology - and wants to extend its presence to areas of ophthalmic, CNS and cardiovascular. DPCL caters to the requirements of small and medium biotech entities to large pharmaceutical companies.



Exhibit 4: DPCL’s presence


CRAMS business of DPCL can be further sub-divided into customs synthesis (CS) and contract manufacturing operation (CMO). While 65% of CRAMS revenues flow from CS, 35% is contributed by CMO.

CS: This involves clinical research and supply. DPCL has 12 projects in late Phase-3 pipeline (which is a high number among Indian peers) and this base has been showing a healthy YoY growth. EBITDA margin stands at 19%-20% (lower than that of CMO). The client profile is now well diversified with top 10 clients contributing about 35% to revenues. Revenues from this segment are largely dependent on the requirement of the customers. Mylan, Abbott, Johnson & Johnson, Novartis and Celgene are some of its top clients. Generally, a large pipeline is required for commercial products, given the high drop-out rate in pharmaceutical approvals and high entry barriers.

CMO: The company is currently manufacturing 16 molecules under this segment. This business has higher margins, with EBITDA margin being about 50%-55% and PAT margin 35%.As the Phase-3 pipeline feeds CMO business, meaningful growth can be expected from this segment. Going forward, the management expects revenues of about Rs 4bn to flow in on a yearly basis.

Exhibit 5: Client concentration (in percentage terms) Exhibit 6: Therapy-wise break-up


40

40

20

0 10 20 30 40 50

Balance

Top 10 Clients

Top 5 Clients

Client Concentration

45%

15%

10%

30%

Oncology CVS Ophthal Others



Exhibit 7: CRAMS revenues (Rsmn)


The revenues from this vertical posted a CAGR of 12% over FY12-FY16. For FY17, we expect the revenues to remain flattish, mainly because of deferral in product delivery to the next financial year. Going forward, a healthy YoY growth of 11%-12% can be expected in FY18 and FY19. This will be mainly on account of:

1. Strong order book

DPCL had total order book exceeding US$150mn in FY17. The order book of projects at Carbogen AMCIS AG stands at about CHF80mn and its India order book is worth US$40mn.

2. Approval of oncology molecule

DPCL has given guidance that it has been into late stage clinical supply of an API for a breakthrough drug in ovarian cancer. According to DPCL, the client is also pursuing the same molecule for a few other indications in oncology, in mid- late stage studies. We believe the product is Niraparib, which was recently approved by the USFDA for ovarian cancer. Niraparib is approved under the brand Zejula and has received a very wide label when viewed in comparison to competing drugs. Niraparib works through a mechanism called PARP inhibition. Direct competitors of Niraparib include Olaparib and Rucaparib which have also been approved for treatment of ovarian cancer. Compared to Olaparib and Rucaparib, Niraparib targets a larger patient population. It has been approved as a maintenance treatment for platinum-sensitive ovarian cancer patients who have BRCA mutation/ wild type. Other drugs have also been approved only for those ovarian cancer patients who have BRCA mutation (about 25% of overall population). There are some important benefits from a patient/physician perspective which we believe should make Niraparib the treatment of choice in a maintenance setting:

1) First-mover advantage in the maintenance setting.

2) Clinical data which is comparable to Lynpraza in BRCA mutation sub-type. Lynpraza has not been tested in BRCA wild type ovarian cancer patients.

3) As Niraparib can be used irrespective of the BRCA mutation status, it does not require a companion diagnostic, which competitors will require. This will not only lower the overall effective healthcare costs, but also make it easier for physicians to take treatment decision.

DPCL hopes to capture about 1.5% to 2.5% of brand sales of the product through API sales. We have done a market model for Niraparib which indicates that DPCL should be able to garner US$28mn in peak sales from this opportunity. We expect DPCL to be able to achieve peak sales by 2020. If Niraparib is also approved in other indications, peak sales could be much higher than what we currently estimate.

8,133

9,335

11,009 11,118 11,057

12,285

13,719

13.3 14.8

17.9

1.0

(0.5)

11.1

11.7

(5)

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5

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10,000

12,000

14,000

16,000



(%)(Rsmn)



Exhibit 8: Important catalysts that will define peak sales of Niraparib

Event Indication Timeline

EU approval First-line maintenance setting in ovarian cancer 3QFY18

Phase-2 clinical data Ovarian cancer patients who have undergone 3-4 lines of treatment 3QFY18

Phase-3 clinical data HER2 negative breast cancer with BRCA mutation 3QFY18

Source: Nirmal Bang Institutional Equities Research

Exhibit 9: Market model of Niraparib - US market

Comments

Women diagnosed with ovarian cancer in the US 22,440 -

% Diagnosed with high grade serious ovarian carcinoma 70 -

# Diagnosed with high grade serious ovarian carcinoma 15,708

% Patients that respond to first line platinum therapy 75 -

# Patients that respond to first line platinum therapy 11,781 -

% Eligible for maintenance therapy (platinum sensitive) 70 -

% Eligible for maintenance therapy (platinum sensitive) 8,246.7 -

% of which have BRCA mutation 25 -

% of which have BRCA wild type 75 -

Niraparib share in % in patients with BRCA mutation 50 AstraZeneca's Olaparib will compete directly.

Niraparib share in % in patients with BRCA wild type 100 No competitor.

# patients diagnosed with Niraparib with BRCA mutation 1,030.8 -

6,185.0 -

# patients diagnosed with Niraparib with BRCA wild type - -

Cost of therapy per annum (US$) 84,000 Manufacturer’s price at 30% discount to list price.

Duration of therapy in BRCA mutation patient years 1.75 -

Duration of therapy in BRCA wild type patient years 0.76 -

Sales in BRCA mutation (US$mn) 151.5 -

Sales in BRCA wild type (US$mn) 394.0 -

Total Niraparib sales in the US 545.5 -

Total Niraparib API sales as a percentage of brand sales 1.75 -

Total Niraparib peak API sales (US$mn) in the US 9.5 -

Total Niraparib peak sales in (US$mn) in the EU 22.9 3x of US sales. Incidence in EU is about 66,000 (3x incidence in US). Assuming 80% penetration.

Total Niraparib peak sales in (US$mn) – Outside the US and EU 8.1 25% of sales in the US and EU. This is in line with assumption.

DPCL’s share of Nirparib API sales 65% -

DPCL’s API sales (US$mn) 26 -

Source: Nirmal Bang Institutional Equities Research

3. Pipeline

Currently, DPCL has around nine commercial projects (at Carbogen-Swtizerland), which are either already in validation or expected to go into the validation phase over the next six to nine months. Around 50%-55% of these projects cater to the oncology therapy segment. Also, DPCL has close to 100 molecules in early Phase-II and about 250 projects in pre-clinical Phase-I which are moving towards Phase-II.



Exhibit 10: Pipeline

Phase No. of products

Early Phase-III 15-20

Late Phase-III 14

Late Phase-II 30


API generics: DPCL has filed for 12 API in the US. DPCL is also working on certain specialty products for which there are a few competitors in regulated markets and the company has developed customers for the same. These products are niche and three of them have ready-to-file status. Going forward, from generics the revenue contribution could be around 10%-12%. One of the niche products that DPCL has developed is Isosulfan Blue for which it has already tied up with a customer. Supply has not yet started because the client has not been able to launch its drug in the US market because of the ongoing litigation. Currently, these API generics do not make a significant contribution to the top-line.

Marketable molecules (MM)

Under this vertical, DPCL operates through three sub-segments – specialty chemicals (quats), vitamins & chemicals and disinfectants. The base business here is direct sale of cholesterol products. DPCL has moved away from formulation Vitamin D products to Vitamin D analogues. This has been undertaken because of commoditisation of Vitamin D and the intense pressure faced by DPCL on account of competitive pricing by Garden, DSM and other competitors. DPCL is now focused on Calcifediol which is a highly-concentrated Vitamin D analogue. These products have less competition.

Currently, disinfectants form a small part of the MM vertical in terms of revenue contribution. However, it is expected to scale up. The margin in disinfectants depends on the geographies where they are sold. However, the company expects the consolidated margin to be in the range of 25% to 35%. For Vitamin D, the margin is expected to be 25%.

Revenue and growth drivers

Exhibit 11: MM revenues (Rsmn)


The revenues from this vertical posted a CAGR of 4% over FY12 to FY16. For FY17, revenue decline of 12% is expected on account of DPCL’s exit from Vitamin D orals and increased focus on Vitamin D analogues. After this a growth of 4% on YoY basis is expected. This will be on account of:

4,590 4,518

4,743

4,843

4,266

4,437

4,615

13.0

(1.6)

5.0 2.1

(11.9)

4.0

4.0

(15)

(10)

(5)

0

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3,900

4,000

4,100

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4,600

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4,800

4,900



(%)(Rsmn)



1. Increased focus on Vitamin D analogues

Vitamin D analogues are considered to be better for human consumption in terms of efficacy and acceptability by the human body. About Rs2,000 mn can be expected to flow in as Vitamin D revenues with EBITDA margin of 20%-24%. The remaining revenues are expected from direct sale of anti-cholesterol products which the company manufactures.

2. Revenues from disinfectants

DPCL has secured supply contracts from three global MNCs, one of them being Johnson & Johnson. Revenues to the tune of Rs1bn are expected to accrue from this contract over the next three years.

Amalgamation scheme will allow tax savings to the tune of Rs270mn

The scheme of amalgamation undertaken by DPCL consists of the following activities (effective from 17 March 2017):

1. Slump sale of effluent treatment plant (ETP) undertaking from DPCL to CAIL

2. Amalgamation of Dishman Chemicals (DCL), a wholly-owned subsidiary with DPCL

3. Amalgamation of Carbogen Amcis India (CAIL) with DPCL

4. Change in name of CAIL to Dishman Carbogen Amcis

The details of the companies involved in this arrangement are as follows:

Particulars (Rsmn) DPCL DCL CAIL

Total assets as of 31 December 2015 17,665.72 137.56 174.93

Total turnover for nine months ended December 2015 3,671.55 4.5 47.5


Consideration proposed:

1. Slump sale – Rs150mn

2. DCL amalgamation – No shares. Upon amalgamation, equity shares of DCL held by DPCL shall be deemed to be cancelled and stand extinguished without consideration.

3. CAIL amalgamation – Shareholders of DPCL will be issued one fully paid-up share (face value Rs2 per share) of CAIL for every fully paid-up equity share held in DPCL. Equity shares of CAIL held by DPCL shall be deemed to be cancelled upon amalgamation.

Consequent to this amalgamation, intangible assets are expected to swell with an increased amortisation benefit of Rs900mn. This will lead to lower tax to the tune of around Rs270mn.

Debt position

Gross/net debt in 9MFY17 stood at Rs8, 800mn/Rs8,500mn, respectively. DPCL has successfully reduced its cost of debt to around 4%-5% as a result of restructuring. It does not intend to undertake further debt, but intends to follow the debt repayment schedule. Accordingly, the debt is expected to come down to around Rs7,413mn by FY19.

Exhibit 12: Total Debt Exhibit 13: Debt break-up


7,642

7,907

7,370

8,413

7,913 7,913

7,413

6,800

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400

8,600


(Rsmn)

4,336 4,121 3,302

4,189 3,689 3,189 2,689

3,306 3,787

4,068

4,224 4,224 4,724

4,724

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Long Term Short Term

(Rsmn)



Capex

DPCL requires about Rs1,800mn of capex for FY18 and FY19, which is expected to be funded mainly through cash accruals. This is mainly for modification and upgradation of a new building and towards carbogen AMCIS /custom synthesis business. Some funds will also be deployed towards the HIPO facility where two plants are already in operation. Currently, the company is in a position to add about Rs3,000mn-Rs5,000mn to its top-line without any major capex. The policy followed by the company with regard to capex is that unless there is a substantial commitment on a long-term basis of a significant volume, no dedicated capex will be put in place.

Margin expansion

While revenues are expected to post a CAGR of 9% over FY17E-FY19E, EBITDA and PAT growth is expected to outpace revenues with a CAGR of 19/28%, respectively. This is on account of improvement in capacity utilization, business mix and savings in financial costs on account of debt refinancing/repayment. The company expects that it should be able to achieve EBITDA margin of around 30% by FY19. There could be significant expansion in net profit in FY18 by virtue of savings in interest costs. About Rs250mn-Rs300mn of savings in interest costs are expected by FY18 through: 1. Refinancing of Rs2bn debt at a lower cost (from 12% to 3%). This should translate into savings of Rs180mn. 2. Part of US dollar-denominated debt at LIBOR + 4% should come down to 3%. 3. Retirement of about Rs1bn debt in FY17 should yield savings of Rs80mn-Rs100mn.

Exhibit 14: EBITDA Exhibit 15: PAT


Improvement in business mix

The CRAMS business has witnessed margin improvement because of execution of commercial products where DPCL focuses on replacing low value products with high value commercial products. Additionally, over the past two years, DPCL is undertaking efforts to discontinue Vitamin D formulations and focus completely on Vitamin D analogues – which enjoy high value and high margins. This is also being reflected in margin improvement. In case of marketable molecules business, excess capacity of 40% is available which will also drive margin expansion. The Hypo division is booked for the next one year, with revenue visibility to the tune of US$10mn-US$12mn. EBITDA margin for these products is expected to be around 50%.

Capacity utilization

Consequent to the shift of focus of Mr. Janmejay Vyas towards production optimization and R&D (two years ago) the margins and capacity utilization have improved. Carbogen AMCIS operates at 90%-95% capacity, whereas Indian and Chinese facilities operate at 60%-65% and 30%, respectively.

Currently, the Chinese facility caters mainly to India and Switzerland business of DPCL for supply of intermediaries. The Manchester site is also a non-GMP site, which supports Switzerland with non-GMP complex molecules and the product on this site is on target as per the budgets.

At Unit 9, DPCL has certain compounds which it supplies to four clients for which commercial production is expected to begin next year. Unit 9 is in the validation process for the US customers, for products which have been fast tracked by the USFDA. If these products get the necessary approvals, then in order to adjust to the increased commercial volume from this, modest expansion may be required at Unit 9 facility. For a couple of other molecules (at Unit 9 facility) with an European customer, DPCL expects to be in the validation process by the end of FY17 for at least one of the products.

2,901 3,321 3,127 4,103 4,253 5,043 6,003

23 24

20

26 26 29

31

-

5

10

15

20

25

30

35

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000


EBITDA Margin(%)

(%)(Rsmn)

1,003 1,093 1,198 1,711 2,135 2,745 3,512

8 8 8

11

14

16

19

-

5

10

15

20

25

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


PAT Margin (%)

(%)(Rsmn)



The Riom site is a small, clinical size formulation facility. It is working on novel micro encapsulation projects with a customer who provides a good base. Dishman Netherlands continues to focus on Vitamin D analogue, which is low volume and high margin product.

The formulation facility in France is working with an international company and the work undertaken there is on development of direct microencapsulation techniques (in sterile conditions), rather than following the usual practice of putting the drug and recipient into a tablet or into a capsule. Peak revenues from this facility could be in the range of Euro3mn-Euro 5mn on an annual basis. It is a relatively small facility with only 21 employees. This facility can go for clinical trial supplies only up to Phase II.

DPCL has also acquired a building in Switzerland which serves as a land bank. It could give the company an opportunity to rapidly (in about 12-18 months) add a third additional capacity for development of oncology products as there is long-term potential in this segment.

Valuation

We have valued DPCL at a P/E ratio of 17.45x to arrive at the target price of Rs380. The P/E multiples of seven competitors were considered and an average was arrived at which has been considered for valuation.

Exhibit 16: Relative valuation

Sr. No.

Company Sales (Rsmn) P/E (x) EV/EBITDA (x)

2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

1 Albany Molecular Research 46,645 50,313 53,398 13.75 11.50 10.79 10.09 9.06 9.46

2 Neuland Labs 58,310 70,590 86,170 35.65 29.60 20.98 15.41 11.96 9.32

3 Divis Laboratories 42,389 43,162 45,164 14.09 15.21 14.96 10.23 11.07 10.54

4 Cambrex Corporation 34,926 37,717 40,944 18.71 17.31 15.20 11.06 11.50 NA

5 Suven Lifesciences 5,291 5,935 6,668 23.28 18.70 16.27 15.48 12.37 10.79

6 Bachem Holding AG 17,039 19,489 22,774 35.09 28.86 20.99 21.52 17.96 14.47

7 Syngene International 12,722 15,259 18,768 34.48 29.59 22.94 23.79 19.72 15.55

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Risks to our recommendation

The following events pose downside risks to our recommendation:

1) Significant depreciation of US dollar or USD versus Indian rupee or INR.

2) Failure to maintain regulatory compliance for its manufacturing facilities could result in substantial loss of business.

3) Imposition of border tax in the US could negatively impact the overall CRAMS business.



Financial statements

Exhibit 17: Income statement


Net sales 15,887 15,961 15,571 16,970 18,581

% growth 15 0 (2) 9 9

Raw material costs 5,495 3,363 2,792 2,900 3,020

Staff costs 4,232 5,355 5,498 5,778 6,073

Other expenditure 3,034 3,139 3,027 3,248 3,485

Total expenditure 12,760 11,857 11,317 11,927 12,579

EBITDA 3,127 4,103 4,253 5,043 6,003

% growth (6) 31 4 19 19

EBITDA margin (%) 20 26 27 30 32

Other income 869 265 457 309 450

Interest costs 897 944 681 418 402

Gross profit 10,393 12,598 12,778 14,070 15,561

% growth 3 21 1 10 11

Depreciation 1,507 1,091 1,184 1,277 1,370

Profit before tax 1,592 2,334 2,846 3,658 4,681

% growth 2 47 22 29 28

Tax 394 624 711 915 1,170

Effective tax rate (%) 25 27 25 25 25

Net profit 1,198 1,711 2,135 2,745 3,512

% growth 10 43 25 29 28

EPS (Rs) 15 21 13 17 22

% growth 869 265 457 309 450


Exhibit 1:

Exhibit 2: Exhibit 19: Balance sheet


Equity 161 161 161 161 161

Reserves 12,217 14,354 16,470 19,195 22,688

Net worth 12,378 14,515 16,631 19,357 22,849

Minority Interest - 4 4 4 4

Net deferred tax liabilities 629 774 774 774 774

Short-term loans 4,068 4,224 4,224 4,724 4,724

Long-term loans 3,302 4,189 3,689 3,189 2,689

Other non-current liabilities 733 805 805 805 805

Liabilities 21,110 24,512 26,128 28,853 31,846

Gross block 19,130 21,114 22,914 24,714 26,514

Less: Acc. Depreciation 7,285 8,578 9,761 11,038 12,407

Net block 11,845 12,536 13,153 13,676 14,107

Capital WIP 1,418 854 854 854 854

Intangible assets and goodwill 2,565 2,914 2,914 2,914 2,914

Othernon-current assets 2,127 2,483 2,483 2,483 2,483

Inventories 4,483 4,831 1,955 2,030 2,114

Debtors 2,171 1,523 1,463 1,596 1,750

Cash 362 622 4,417 6,422 8,758

Loans and advances 3,030 3,795 3,643 3,976 4,359

Other current assets 90 247 247 247 247

Total current assets 10,135 11,018 11,724 14,270 17,228

Creditors 1,514 870 722 750 781

Other current liabilities 5,465 4,424 4,279 4,597 4,963

Total current liabilities 6,980 5,293 5,001 5,347 5,744

Net current assets 3,156 5,725 6,723 8,924 11,485

Total assets 21,110 24,512 26,128 28,853 31,846


Exhibit 3: Exhibit 18: Cash flow


EBIT 2,489 3,278 3,527 4,076 5,083

(Inc.)/dec. in working capital (143) (2,309) 2,796 (196) (224)

Cash flow from operations 2,346 969 6,323 3,880 4,859

Other income (869) (265) (457) (309) (450)

Other expenses (48) 145 - - -

Depreciation 1,507 1,091 1,184 1,277 1,370

Tax paid (-) (394) (624) (711) (915) (1,170)

Net cash from operations 2,541 1,316 6,338 3,933 4,609

Capital expenditure (-) (1,494) (1,567) (1,800) (1,800) (1,800)

Net cash after capex 1,047 (251) 4,538 2,133 2,809

Other Investing activities 934 (91) 457 309 450

Cash from financial activities (1,972) 602 (1,201) (437) (921)

Opening cash balance 353 362 622 4,417 6,422

Closing cash balance 362 622 4,417 6,422 8,758

Change in cash balance 9 259 3,795 2,005 2,337


Exhibit 4: Exhibit 20: Key ratios

Y/E March FY15 FY16 FY17E FY18E FY19E

Profitability & return ratios

EBITDA margin (%) 19.7 25.7 27.3 29.7 32.3

EBIT margin (%) 15.7 20.5 22.7 24.0 27.4

Net profit margin (%) 7.5 10.7 13.7 16.2 18.9

RoE (%) 9.7 11.8 12.8 14.2 15.4

RoCE (%) 15.9 17.5 17.4 18.1 19.9

Working capital & liquidity ratios

Receivables (days) 49.9 34.8 34.3 34.3 34.4

Inventory (days) 297.8 524.3 255.5 255.5 255.5

Payables (days) 100.6 94.4 94.4 94.4 94.4

Current ratio (x) 1.5 2.1 2.3 2.7 3.0

Quick ratio (x) 0.8 1.2 2.0 2.3 2.6

Valuation ratios

EV/sales (x) 3.3 3.4 3.2 2.8 2.4

EV/EBITDA (x) 17.0 13.1 11.6 9.3 7.4

P/E (x) 20.9 14.7 23.5 18.3 14.3

P/BV (x) 4.1 3.5 3.0 2.6 2.2




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Stock Ratings Absolute Returns

BUY > 15%

ACCUMULATE -5% to15%

SELL < -5%

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