Sunday, April 11, 2010

Dishman Pharma - Buy

Investors with a long-term perspective can consider adding the stock of Dishman Pharmaceuticals and Chemicals to their portfolio.

An established player in the contract research and manufacturing services space, the stock has underperformed the market in recent times led by a poor financial performance. While the company may report lacklustre numbers for the March 2010 quarter also, growth prospects appear good over a two- to three-year time frame.

With many of its new facilities becoming operational and improving demand from the global pharma space, the company could get back on the growth track. Valuations do not fully capture the improving prospects. At the current market price of Rs 224, the stock trades at about 11 times its FY11 per share earnings, at a discount to many of its peers.

In the current year, the management expects to post a sales growth of 20-25 per cent. This appears quite chievable given the improving order pipeline and the low base of last year.

Besides, with better demand for contract research, the outlook for its Swiss subsidiary, Carbogen Amcis (CA), also holds promise. CA's poor performance in the December 2009 quarter had forced the company to cut down the overall sales guidance from flat to a negative 10 per cent (about Rs 950-1,000 crore) for FY10.

Dishman may also see benefits accruing from its newly operational facilities. Apart from the Bavla expansion, it has commenced operations at its high-potent API (active pharmaceutical ingredient) facility. This facility will cater to orders from its Swiss subsidiary as well as manufacture generic anti-cancer products for other clients. While order flows may take some time, the margins enjoyed on such orders are likely to be higher.

China facility

Dishman's soon-to-be-operational China facility too holds potential, considering that many global pharma companies have announced incremental investments in the Chinese market. The facility is likely to begin contributing to revenues from this fiscal; global companies such as Johnson & Johnson, Novartis and AstraZeneca have already evinced interest in sourcing APIs from the facility.

Likely improvement in order flow from Solvay-Abbott is the other potential revenue trigger. With the Abbott-Solvay acquisition now complete, Solvay revenues may soon be back on track. That the company has expanded its client base to include companies such as AstraZeneca, Roche, Sanofi Aventis and Novartis is also a positive.

Srividhya Sivakumar

BL Research Bureau

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