Stock Update : Dishman Pharmaceuticals - Turnaround on a slow but steady path.

Post our last update on Dishman, let’s revisit the turnaround story again. Most of the optimism has been turned into pessimism especially on following counts:

• Continued high pledging from promoters ( rising consistently over the last 4 quarters as the stocks plummeted)
• Management ineffectiveness in selling of the SEZ land and debt reduction from that front.
• China facility continues to bleed. Dishman has strong intention to sell off the unit, though it continues to operate it till it finds a suitable buyer, and bear the losses.

Let us look at how the company fared on the number’s front.

Post FY12, we now have a full year’s numbers, let’s see how the company did

	FY 08	FY 09	FY 10	FY 11	FY 12	FY13
Sales Turnover	100%	100%	100%	100%	100%	100%
Raw Materials	39%	30%	30%	38%	35%	30%
Other Expenses	10%	20%	18%	14%	18%	20%
Employee Cost	26%	25%	27%	27%	26%	28%
EBITDA	25%	25%	25%	21%	21%	23%
Interest & Financial Charges	4%	5%	4%	5%	6%	6%
EBDT	21%	21%	21%	15%	15%	18%
Depreciation	6%	6%	6%	7%	7%	7%
Profit Before Tax	15%	15%	15%	9%	8%	11%
Tax	0%	1%	2%	1%	3%	4%
Profit After Tax	15%	14%	13%	8%	5%	8%

So as we see the company has course corrected post FY12, point to note is the improved margins at EBITDA level, reduced finance costs and the improvements hitting the bottom line with NPM rising to FY11 levels of close to 8%.

One quick look at the SHP, it cautions us about the increasing pledge from the promoters, while at the same time, the turnaround is getting traction seen from increasing stake from FII ( up from 3.29% to 9.1% in a year)

Shareholding Group	Mar-13	Dec-12	Sep-12	Jun-12	Mar-12
Promoter and Promoter Group	61.37%	61.36%	61.36%	61.36%	61.36%
Pledged (as a %age of Promoter Holdings)	17.72%	9.65%	7.82%	6.00%	4.99%
FII	9.10%	8.40%	6.41%	3.17%	3.29%
DII	6.15%	6.05%	6.42%	7.11%	6.40%
Bodies Corporate	9.24%	10.21%	11.74%	13.85%	15.90%
Retail	14.14%	13.98%	14.07%	14.51%	13.05%

Looking at the results in details:

    

Year to March (INR Crs.)	FY12	FY13	YoY Growth
Net Revenues	1124	1272	13%
( - ) Materials Cost	385	376	-2%
Gross Profit	739	896	21%
( - ) Employee Expenses	294	351	19%
( - ) SG &A Expenses	221	255	15%
EBITDA	224	290	29%
EBITDA margin	19.93%	22.80%
( - ) D&A	77	84	9%
EBIT	148	206	39%
Other income	13	18	38%
EBIT incl. other income	161	224	39%
( - ) Net finance expense	73	79	8%
Profit before tax	88	145	65%
( - ) Provision for taxes	31	45	45%
Adjusted net profit	57	100	75%
Basic shares outstanding  (Cr)	8.07	8.07	0%
EPS	7	12.4	77%

For the whole year the company has posted 13% sales growth which has reflected to a whopping 75% growth in net profits thanks to margin levels like CRAMs business from Carbogen Amcis ( Margins recovered to 16.4% from 7.7% earlier) and also the high margin Vitamin D business (registered 43% growth).

Revenue Split ( INR Cr)	FY13	FY12	YoY Growth
CRAMs (64%)	813.26	716.46	14%
Indian CRAMs	336.10	319.46	5%
Carbogen Amcis	477.20	397.00	20%
Marketable Molecules (36%)	454.31	405.60	12%
Vitamin D	243.40	170.59	43%
Others	210.90	235.01	-10%

Looking ahead the company can see improvements from the following points

• Debt reduction : The company reduced debt by 100 Cr in FY13 to 818 Crs (Mar 2013) vs INR 916 crs (Mar 2012). The D/E reduced from 1.0x to 0.78x. There is only maintenance capex required for FY14 and FY15. Company plans to reduce 100 Cr of debt from cash flows, and another 100 Cr from SEZ land sale. Maintenance capex to the tune of 40 Cr is required for FY14.
• Improvement in cash conversion: Company need to maintain higher inventory days ~300 days thereby blocking capital. Its debtor days reduced to 38 days while payable days increased to 288 days reducing the cash conversion cycle further.
• Riding on Anti-Cancer drugs: Dishman has orders of $10-15mn for FY14 from Novartis, Merck and Astra Zeneca for anti-cancer products. Currently, the company operates two modules. Two more molecules are being added to contribute in FY14.

Looking at optimistic projections:

Year to March (INR Crs.)	FY13	FY14	YoY Growth
Net Revenues	1272	1,386	9%
( - ) Materials Cost	376	395	5%
( - ) Employee Expenses	351	393	12%
( - ) SG &A Expenses	255	286	12%
EBITDA	290	313	8%
EBITDA margin	22.80%	22.57%
( - ) D&A	84	94	12%
( - ) Net finance expense	79	63.2	-20%
Other income	18	18	0%
PBT incl. other income	145	174	20%
( - ) Provision for taxes	45	52	16%
Adjusted net profit	100	122	22%
Basic shares outstanding  (Cr)	8.07	8.07	0%
EPS	12.4	15.07	21%

The management expects an overall 9% sales growth with 10% growth from Carbogen Amcis. Here the main pointers are towards cost control and debt reduction. Looking at the robust operational cash flows + maintenance capex only + proceeds from SEZ land sale ( And/Or disposal of China facility) there can be savings in finance cost, and financial leverage to aid the bottom line.

At a FY14E EPS of 15.07 assuming a 8x multiple, one can look at a one year forward price of 120+ by June 2014, which corresponds to a upside of 85% in 1 year based on CMP of Rs 65 ( as on 11-Jun-2013)

Disclosure: Long positions.