4QFY2013 Result Update | Pharmaceutical

June 3, 2013

Dishman Pharmaceuticals
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Net profit/(loss) 4QFY2013 345 14 72 17 19 3QFY2013 318 12 57 25 16 % chg qoq 8.8 27.5 (31.5) 13.2 4QFY2012 350 9 82 22 31 % chg yoy (1.4) 44.7 (12.4) (20.8) (40.7)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 556 831 1.0 125 / 48 226,849 2 19,610 5,939 DISH.BO DISH@IN

`69 `168
12 months

Source: Company, Angel Research

For 4QFY2013, Dishman Pharmaceuticals & Chemicals (Dishman) reported OPM and net profit below our estimates, while sales came in just in line with our expectations. The sales and net profit came in at `345cr and `19cr, vs our expectation of `358cr and `29cr, respectively. For FY2014, the company has guided towards a 10-12% growth in sales and OPM to come in at 23%. We maintain our Buy rating on the stock. Lower-than-expected net profit during the quarter: Dishman reported net sales of `345cr during 4QFY2013, reporting a de-growth of 1.4% yoy, just in line with our expectation of `358cr. Segment wise, the CRAMS business grew by merely 0.4% yoy, whereas the market molecules (MM) business de-grew by 2.9% yoy to end at `127cr. The gross margin for the quarter expanded significantly to 72.1% (65.1% in 4QFY2012). The OPM contracted to 20.9% (23.5% in 4QFY2012). This led the company to report a dip in net profit by 40.7% to `19cr. Outlook and valuation: We expect Dishmans net sales and net profit to come in at `1,534cr and `135.8cr, respectively, in FY2015. At current levels, Dishman is trading at 4.6x and 4.1x FY2014E and FY2015E earnings, respectively. We believe the current valuations are attractive, hence, we maintain our Buy recommendation on the stock with a target price of `168.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 61.4 15.4 9.9 13.3

Abs. (%) Sensex Dishman

3m 3.7 1.2

1yr 22.8 38.6

3yr 15.2 (65.0)

Key financials (Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2012

FY2013

FY2014E

FY2015E

1,124 13.4 56.8 (29.0) 7.0 20.0 9.8 6.3 7.9 0.6 1.2 6.2

1,268 12.8 100.3 76.4 12.4 22.5 5.5 10.1 10.4 0.5 1.1 4.7

1,394 10.0 120.9 20.6 15.0 22.5 4.6 11.0 10.9 0.5 1.0 4.4

1,534 10.0 135.8 12.3 16.8 22.4 4.1 11.2 11.1 0.4 0.8 3.7 Sarabjit Kour Nangra
+91 22 3935 7800 Ext: 6806 [email protected]

Please refer to important disclosures at the end of this report

Dishman | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 performance (Consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margins Operating profit OPM (%) Interest Dep & amortisation PBT Provision for taxation Reported net profit Less : Exceptional items Minority interest PAT after exceptional items Adj. PAT EPS (`)
Source: Company, Angel Research

4QFY2013 345 14 359 249 72.1 72 20.9 17 23 45 27 19 19 19 2.3

3QFY2013 318 12 329 209 65.8 57 17.8 25 21 22 6 16 16 16 2.0

% chg qoq 8.8 9.1 19.2 27.5 (31.5) 12.8 101.9 342.2 13.2 13.2 13.2

4QFY2012 350 9 360 229 65.4 82 23.5 22 18 52 21 31 (0.0) 31 31 3.9

% chg yoy (1.4) 44.7 (0.1) 8.8 (12.4) (20.8) 29.4 (13.0) (40.7)

FY2013 1,268 22 1,290 892 70.3 285 22.5 79 84 145 45 100 0

FY2012 1,122 15 1,137 738 65.8 222 19.8 73 77 88 31 56 (0) 0 56 57 7.0

% chg 13.0 49.8 13.5 20.8 28.6 8.1 9.6 65.8 44.3 77.7

(40.6) (40.7)

100 100 12.4

77.7 76.4

Exhibit 2: 4QFY2013- Actual Vs Angel estimates

(` cr)
Net sales Other income Operating profit Interest Tax Net profit
Source: Company, Angel Research

Actual
345 14 72 17 27 19

Estimates
358 10 82 21 21 29

Variation
(3.5) 44.1 (11.7) (17.9) 28.7 (35.0)

Revenue dipped : Dishman reported net sales of `345cr during 4QFY2013, a degrowth of 1.4% yoy, just in line with our expectation of `358cr. Segment wise, the CRAMS business grew by merely 0.4% yoy, whereas the market molecules (MM) business de-grew by 2.9% yoy to end at `127cr. Carbogen Amics (CA) reported a 4.1% yoy growth in 4QFY2013. The OPM came in at 12.8% for the quarter. Currently CA has a total order book of Euro20mn (for 8 months). For FY2014, the Management indicated that CA is likely to post a growth of 10% in sales and have an OPM of 20%. On the other hand, the Vitamin D business posted a sales de-growth of 31.3% yoy to `52cr. On the operating front, the margins fell to 9.7% vs 26.5% as in the corresponding period of last year. The sales and the OPM during the quarter were impacted, given the temporary disruption of manufacturing in Dishmans Netherlands Vitamin D plant, which is expected to be resolved by 3QFY2014. Thus the full impact of this new plant commissioning will be visible in the business only in FY2015. The Vitamin D business contributes around 16.6% to the overall sales of the company (as in FY2013).

June 3, 2013

Dishman | 4QFY2013 Result Update

Exhibit 3: Sales trend

400
350

350
315 318 289

345

300
250

(` cr)

200
150 100 50 0 4QFY2012 1QFY2013 2FY2013 3FY2013 4QFY2013

Source: Company, Angel Research

OPM contracts yoy: During the quarter, the gross margin expanded significantly to 72.1% (65.1% in 4QFY2012) while the OPM contracted to 20.9% (23.5% in 4QFY2012). The gross margin expansion did not translate into the OPM expansion, as the other expenditure incased significantly, rising 32.3%. However, excluding the forex gain / (losses), the OPM was at 30.2% vs 27.9% as in the last corresponding period. For FY2014, excluding the forex gain / losses, the company posted an OPM of 24.9% vs 21.9% during the last corresponding period.

Exhibit 4: OPM trend

28.0 26.5 23.5

26.0
24.0

22.0
(%)
20.0 18.0

20.9

20.1

17.8

16.0
14.0

12.0
10.0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Source: Company, Angel Research

Net profit lower than expectation: During the quarter, the company reported a net profit of `19cr as compared to a profit of `29cr in the last corresponding period. The net profit was much lower than the expected net profit of `29cr due to lowerthan-expected OPM during the quarter.

June 3, 2013

Dishman | 4QFY2013 Result Update

Exhibit 5: Net profit trend

50 40 31 30 20 10 0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013 39

(` cr)

27 19

16

Source: Company, Angel Research

Investment arguments

Focus on profitability: Dishman has been incurring a capex of around ~`100`200cr on an annual run-rate over the last couple of years. With the major capex out, the company is now focused on improving the overall profitability of the business, which is evident from the improvement in the OPM of the company, with it having improved from 16.4% in FY2011 to 22.5% in FY2013, thus improving the overall profitability of the company. The ROCE of the company improved from 5.5% in FY2011 to 10.4% in FY2013. Going forward, with focus on profitability, the company has reduced its capex plans (~`30-40cr in FY2014) and lays focus on sweating its assets and restructuring the business, which will lead to improvement in profitability. CRAMS stabilizing: CRAMS, which contributes around 64% to the overall business has stabilised over the last two years, after a lull. As on May 2013, Carobogen Amics (CA) has a total order book of Euro20mn (for 8 months) and has developed a strong portfolio of 20 niche APIs, which it will file post the client acquisition. For FY2014, CA revenues are likely to improve, posting a growth of 10% and OPM is estimated at 20%. In its Oncology Hippo Unit 9, the company has an order book worth US$10mn with orders from Novo Nordisk, Merck, Astrazeneca and Celegene amongst others. Citing the order book, the Management expects to book revenues of US$10-15mn in FY2014 with EBITDA margins of 35-40%, once the 2 blocks begin to contribute materially. As regards the Vitamin-D business, the full impact of this new plant commissioning will be visible in FY2015. Nonetheless, once the India Vitamin D facility starts contributing in FY2014, the contribution from this business will further scale up. Over the next 2-3 years, the Management expects the business to scale up to `300cr with a 20% EBITDA margin.

June 3, 2013

Dishman | 4QFY2013 Result Update

Outlook and valuation

We expect Dishmans net sales and net profit to come in at `1,534cr and `135.8cr, respectively, in FY2015. At current levels, Dishman is trading at 4.6x and 4.1x FY2014E and FY2015E earnings, respectively. We believe the current valuations are attractive, hence, we maintain our Buy recommendation on the stock with a target price of `168.

Exhibit 6: One-year forward PE

600 500

400 300 200

100 -

Feb-08

Feb-09

Feb-11

Feb-12

Nov-08

Nov-10

Nov-11

May-08

May-10

May-11

May-12

Nov-12

Nov-09

Feb-13

Feb-10

6x
Source: Company, Angel Research

12x

18x

24x

Exhibit 7: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Neutral Buy Buy Buy Buy Buy Neutral Buy Accumulate Buy Neutral Neutral Neutral CMP (`) 137 178 772 369 2,113 69 2,661 65 606 753 362 2,608 1018 Tgt. price (`) 264 909 444 2,535 168 78 665 877 Upside % PE (x) 48.3 17.7 20.3 19.9 144.3 20.0 9.8 16.5 9.8 9.3 16.1 16.6 16.7 4.1 31.9 8.3 13.7 18.0 16.1 26.3 25.6 FY2015E EV/Sales (x) 1.3 1.1 2.0 2.5 2.4 0.8 6.3 0.8 2.1 2.4 1.2 2.6 6.0 EV/EBITDA (x) 6.9 7.1 11.1 11.3 11.9 3.7 22.0 5.5 9.7 11.2 9.3 15.7 14.5 FY12-15E CAGR in EPS (%) 26.1 58.2 12.7 15.9 12.8 33.7 6.1 15.8 24.9 29.1 (6.8) 13.4 18.8 FY2015E RoCE (%) 34.0 12.0 15.4 15.7 18.3 11.0 36.1 15.3 24.8 28.5 13.1 15.9 29.4 RoE (%) 34.7 18.0 23.1 15.9 21.8 11.2 31.0 14.7 25.4 24.8 19.1 16.7 22.0

Source: Company, Angel Research; Note: *December year ending

Background
Dishman commenced business in 1983 as a QUAT (Speciality Chemicals) company and has since emerged a global leader in the segment. Since 1997, Dishman has diversified its interests towards the CRAMS segment. The company has now established itself as a respected and preferred outsourcing partner to various pharma majors offering a portfolio of development, scale-up and manufacturing services. The company caters to the customers' needs ranging from chemical development to commercial manufacture and supply of API. Dishman has large scale manufacturing facilities in India and China.
June 3, 2013

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May-09

Aug-08

Aug-10

Aug-11

Aug-12

Aug-09

Dishman | 4QFY2013 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Recurring PBT % chg PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 928 7 915 915 (13.8) 712 277 66 254 181 204 (26.2) 22.3 59 144 (32.2) 15.8 39 27 20.3 133 (15.8) 133 14.9 11.2 118 118 118 (19.5) 12.9 14.6 14.6 (19.5) 998 8 991 991 8.2 829 355 77 280 194 162 (20.4) 16.4 69 93 (35.3) 9.4 42 40 43.7 92 (30.5) 92 10.8 11.7 81 1 80 80 (32.0) 8.1 9.9 9.9 (32.0) 1,130 6 1,124 1,124 13.4 900 384 83 294 139 224 38.3 20.0 77 148 58.2 13.2 73 13 14.8 88 (4.6) 88 31.2 35.4 57 (0) 57 57 (29.0) 5.1 7.0 7.0 (29.0) 1,278 10 1,268 5 1,272 13.2 982 376 95 351 161 285 27.2 22.5 84 202 36.4 15.9 79 18 12.2 145 65.2 145 45.0 31.0 100 0 100 100 76.4 7.9 12.4 12.4 76.4 1,408 14 1,394 5 1,399 10.0 1,080 413 104 386 177 314 10.0 22.5 92 222 10.0 15.9 83 18 11.0 161 11.0 161 40.3 25.0 121 121 121 20.6 8.7 15.0 15.0 20.6 1,549 15 1,534 5 1,538 10.0 1,190 455 115 426 194 344 9.6 22.4 101 243 9.4 15.8 84 18 9.8 181 12.3 181 45.3 25.0 136 136 136 12.3 8.9 16.8 16.8 12.3

June 3, 2013

Dishman | 4QFY2013 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Share application money Reserves & surplus Shareholders funds Minority interest Total loans Other Long Term Liabilities Long Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Long-Term Loans and Adv. Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 588 45 187 355 200 388 1,590 1,089 248 841 357 2 1 1,338 328 1,010 307 2 1 178 583 43 98 443 260 323 1,821 1,470 440 1,031 418 3 26 155 626 24 146 457 326 301 1,933 1,566 524 1,042 418 12 25 120 673 21 241 581 335 338 1,956 1,596 616 980 418 12 26 132 914 10 265 639 367 546 2,116 1,626 717 909 418 12 26 145 1,134 140 291 702 404 729 2,240 32 1,590 16 8 761 785 774 16 2 861 879 868 6 35 32 1,821 16 2 914 932 850 66 41 45 1,933 16 4 1,026 1,046 800 10 43 58 1,956 16 4 1,136 1,155 850 10 43 58 2,116 16 4 1,260 1,280 850 10 43 58 2,240 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

June 3, 2013

Dishman | 4QFY2013 Result Update

Cash Flow Statement (Consolidated)

Y/E March (`cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 133 59 94 27 (3) 255 (253) (0) 27 (226) 50 (11) (69) (30) (0) 45 45 92 69 (116) 40 (11) (6) (198) 0 40 (158) (6) 95 (9) 81 161 (3) 45 43 88 77 27 13 (31) 173 (244) 0 13 (231) 47 (10) 39 76 18 43 24 145 84 (175) 18 (45) 144 (96) 18 (78) (105) (11) 47 (69) (3) 24 21 161 92 (62) 18 (40) 179 (30) 18 (12) 50 (11) (217) (178) (11) 21 10 181 101 (66) 18 (45) 180 (30) 18 (12) (11) (26) (37) 130 10 140

June 3, 2013

Dishman | 4QFY2013 Result Update

Key Ratio
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.9 3.6 3.7 0.9 5.1 2.2 0.9 3.7 2.0 0.7 2.7 2.6 0.7 2.7 2.7 0.6 2.1 2.9 0.9 109 52 53 148 0.8 94 53 56 115 0.8 96 53 48 90 0.8 99 47 46 85 0.9 97 45 40 111 1.0 110 51 36 134 9.5 12.2 15.8 5.5 7.0 9.6 7.9 10.0 6.3 10.4 13.5 10.1 10.9 14.0 11.0 11.1 14.5 11.2 15.8 88.8 0.6 8.7 4.6 0.9 12.6 9.4 88.3 0.6 5.0 4.5 0.9 5.4 13.2 64.6 0.6 5.2 5.5 0.9 4.9 15.9 69.0 0.7 7.3 6.6 0.8 7.8 15.9 75.0 0.7 8.3 7.5 0.7 8.8 15.8 75.0 0.7 8.7 7.4 0.6 9.5 14.6 14.6 21.9 1.2 97.2 9.9 9.9 18.4 0.9 108.9 7.0 7.0 16.5 0.9 115.5 12.4 12.4 22.8 1.1 129.6 15.0 15.0 26.4 1.1 143.2 16.8 16.8 29.4 1.1 158.6 4.7 3.1 0.7 1.7 1.4 6.3 0.8 6.9 3.7 0.6 1.3 1.4 8.5 0.8 9.8 4.2 0.6 1.3 1.2 6.2 0.7 5.5 3.0 0.5 1.6 1.1 4.7 0.7 4.6 2.6 0.5 1.6 1.0 4.4 0.7 4.1 2.3 0.4 1.6 0.8 3.7 0.6 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

June 3, 2013

Dishman | 4QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Dishman Pharmaceutical No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

June 3, 2013

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