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Recommendations India

DPCL Q1FY15 results update

August 18, 2014, Monday, 16:19 GMT | 11:19 EST | 19:49 IST | 22:19 SGT
Contributed by Nirmal Bang

Dishman Pharma & Chemicals Ltd (DPCL) reported results below consensus expectations however it is just temporary blip and we expect the growth to take momentum from Q2 onwards. The company reported sales of Rs 362.7 cr – 18.3%yoy/-11.4% qoq. Major miss was on EBITDA margins which came to 20.8% at consolidated levels from 27.9% in Q1FY14 and 21.4% in Q4FY14. The key reason for the same is higher contribution of developmental work in Carbogen Amcis as compared to higher commercial production in Q1FY14. This is expected to normalize going forward maintaining the overall positive outlook.

Other Highlights

- Carbogen Amcis: CA reported revenues of Rs 155 cr, up 7.7% yoy, however EBITDA margins for the segment has come down to 12.6% from 25.0% in Q1FY14 and 15.1% in Q4FY14, due to adverse product mix. The company has done 75% developmental work during the quarter as against normal levels of 50%. We believe this would normalize going forward and expect full margins to be around 18%. The facility is likely to do sales of CHF 100 mn (around Rs 670 cr).

- Netherlands: Netherlands has posted sales of Rs 70 cr – 56.2% yoy growth. Noteworthy point is improvement in the margins to 26.9% as compared to 11.3% Q4FY14/18.9% in Q1FY14. As the company enjoyed higher prices during the quarter which is not likely to continue hence sustainable margins going forward is 22-23%.

- Hipo facility is gaining traction and has orders of around $5 mn in hands. It’s a high margin business. DPCL expects to close the year with $8-9 mn of sales from the facility. This is a key differentiator for the company as the facility is one of its kind

- China: as part of global strategy DPCL is transferring orders from it’s over utilized facilities to China. As a result China is expected to break even in FY15 (there was loss of Rs 18-19 cr in FY14) on sales of Rs 40 cr

- CRAMS: Dishman standalone business is flat yoy at Rs 89.4 cr. The company is expecting some big order in 2HFY15.

- QIP: DPCL taken in-principal approval from board for QIP for Rs 200 cr however the comapny doesn’t plan to do any dilution in next 6 months.

- SEZ: Dishman is admist of finalizing the strategy for SEZ land and believes to have better clarity in next 3 months.

Valuation & Recommendation

We expect stock to re-rate from here on the basis of various steps taken by the company like slowdown of investment cycle, focus on small clients to fill the capacity, restructuring at its global plants (Carbogen Amcis and Netherlands), re-start of China facility. We are hopeful of new business like Hi-po and disinfectants. We believe growth to be tailed wind and expect 2HFY15 to be much better. The stock is trading at compelling valuations of 7.5x/5.3x PE on FY15E/FY16E EPS respectively. We recommend a BUY on the stock with target price of Rs 196 (8x on FY16E).