Dishman Pharma Buy on declines

Dishman is expected to report strong growth FY12 onwards.

Contract research and manufacturing services (CRAMS) major Dishman Pharma has seen its stock slide from Rs 219.55 in January to Rs 132.15 in November, on the back of declining revenues and profits. The sluggish business prospects dented the company's performance despite a strong CRAMS product pipeline.

As the slowdown in outsourcing continued, there was a suspension of Eposartan supplies to Solvay due to the restructuring of manufacturing and the merger of Solvay with Abbott. A strengthening rupee against the euro and a delay in the completion of new high potency (HIPO) plant (unit-IX) added to the woes.

However, things are set to improve with better revenue visibility. Solvay's supplies have resumed and could go up to 150 tonnes per annum, analysts said. The HIPO plant is expected to be operational in the March 2011 quarter and commercial supplies to three-four new contracts will commence in the next one year. The commercial supplies for cardio-vascular intermediates will also start in the fourth quarter, and are expected to add $6.5 million (Rs 29.3 crore) to the Q4 revenues.

"While the current year performance was not encouraging, I expect things to improve from the March 2011 quarter onwards," said Ambareesh Baliga, vice-president, Karvy Stock Broking.

In recovery mode for the remaining part of the current financial year, Dishman is expected to report a strong growth FY12 onwards. The company is investing Rs 30 crore to expand Vitamin D2 and D3 capacities, which presently face shortage globally. The plant is expected to be ready by Q1FY12 and peak revenues from this are pegged at Rs 75 crore, reports suggest.

Analysts at Anand Rathi expect the FY11 revenues to grow 11.3 per cent year-on-year to Rs 1,019.3 crore and 19 per cent in FY12. The net profit is expected to grow 16 per cent in FY11 and 35 per cent in FY12. The stock surged 3.25 per cent up on Tuesday with reports of a $50-million order from a European multinational. At Rs 154.15, it trades at 8.3 times the FY12 earnings estimates.

Source : BS

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Midcap Pharma - Best Picks to Buy on dips

Midcap pharma companies are likely to sustain high growth rates and are available at reasonable valuations vis-à-vis their larger peers.

The recent wave of mergers and acquisitions in the pharma space, outsourcing tie-ups between generic players and multinational companies, and the robust growth in the domestic formulations business have led to a surge of interest in the Indian generic pharmaceutical players. The BSE Healthcare Index, which has gained over 50 per cent in the last one year, has been touching its lifetime highs recently. In a volatile market, defensives are considered to be a safe bet — the sector not only promises stability, but also increasing revenue visibility.

However, the large-cap pharma stocks have run up considerably, with the healthcare index quoting at 23 times trailing earnings. In this context, we look at mid-cap pharma companies from the broader BSE 500 basket, with a track record of good revenue and earnings growth that have the potential to grow, and are available at reasonable valuations.

Dishman Pharma
Though CRAMS player Dishman did not have a good March quarter, with consolidated recurring net profit falling by half to Rs 20 crore, the next two years are likely to see improved performance on the back of higher revenues from its key customer, Solvay, and commissioning of its facility that will expand its presence in the niche oncology space. This, coupled with new contracts, should see revenues grow 21 per cent, while profits are likely to grow 36 per cent over for the next two financial years. The stock is trading at 10 times its 2011-12 estimated earnings per share and should yield good returns over a two-year period.

Opto Circuits
This medical equipment company has been a consistent performer. It achieved an annual growth rate of 68 per cent in revenues and net profits over the last five years, aided by acquisitions. Its numbers for 2009-10 were boosted by a strong performance in the invasive segment, which helped revenues and operating profit grow 57 per cent and 51 per cent, respectively, in the March quarter. In addition to newly-launched products in the invasive segments, benefits of which accrue in this financial year, the company is also benefiting from higher volumes and realisations of its patient monitoring and sensors (non-invasive segment). The stock is currently trading at a reasonable 12 times its 2010-11 estimated earnings.

Torrent Pharma
It is the one of the largest domestic players in the high-margin chronic therapeutic categories of central nervous systems, cardio vascular and diabetes. Its branded formulations segment, which accounts for half of its revenues, is expected to grow by a fifth over the next two financial years, both from the domestic market as well as from Brazil, where it is the largest Indian player. In the March quarter, while branded domestic formulations business grew 20 per cent to Rs 165 crore, Brazilian business grew 40 per cent to Rs 77 crore. Expect the Brazilian business to grow on the back of new launches and contribute about 18 per cent to revenues in 2011-12 from about 16 per cent now. The stock is trading at 13 times 2011-12 estimated earnings and should fetch good returns.

POTENT PROSPECTS
	5-year CAGR (%)		Price (Rs)	Mkt cap*	EPS (Rs)
	Net sales	Adj. PAT			FY11E	FY12E
Dishman Pharma.	37.30	27.30	225	1,815	16.60	21.30
FDC	15.00	21.60	95	1,760	NA	NA
Ipca Labs.	17.90	23.60	292	3,566	19.90	24.80
Opto Circuits	68.60	68.80	242	4,417	19.50	23.60
Panacea Biotec	22.40	20.60	184	1,229	15.90	18.50
Strides Arcolab	29.50	17.30	430	1,743	34.10	49.80
Torrent Pharma.	27.30	36.50	581	4,915	37.20	46.10
Market cap & price as on June 24 *In Rs crore Source: CapitaLine, Bloomberg

Ipca Labs
The company is focusing on expanding its presence in the chronic therapy areas of cardiovascular and diabetes as well as pain management from its traditional strengths of anti-malarials and anti-infective drugs. The share of the last two (most of the drugs under price control) have come down to 26 per cent from 37 per cent over the last five years. The share of pain management has doubled to a quarter of revenues in the domestic formulations segment. In addition to the domestic segment, Ipca is banking on the generic formulations business (exports) to grow rapidly, especially in the EU region on the back of higher filings and approvals. The company, which started catering to the US market in 2008, is likely to see higher sales from this market after its Indore special economic zone (SEZ) is approved. The stock is trading at 11.8 times its 2011-12 estimated earnings and should be considered.

Strides Arcolabs
Strides Arcolabs is a key player in the sterile injectables space and oncology space. The company recently entered into a contract with Pfizer for the supply of 45 products to be sold in the developed markets. In addition, the company has also entered into a deal with GSK, whereby the UK-based multinational will market its range of branded generic drugs in 95 countries. The company has filed 130 abbreviated new drug applications (ANDAs) with the US FDA and has plans to file a further 40 ANDAs in the current year on products that have a market size of $6.1 billion. On the back of its tie-ups, supply arrangements with MNCs and expansion of its business in key markets should see it improve its revenues by over 35 per cent with margins improving from 16 per cent to about 21 per cent. The stock, which has run up recently, is quoting at 12.6 times its CY11 estimated earnings. Buy on dips.

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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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