2QFY2013 Result Update | Pharmaceutical

November 2, 2012

Dishman Pharmaceuticals
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Net profit/(loss)
Source: Company, Angel Research

BUY
CMP Target Price `96 `145
12 months
2QFY2012 269 0 47 15 (6) % chg yoy 7.5 1,868.8 23.7 (12.0) -

2QFY2013 289 9 58 13 27

1QFY2013 315 3 84 23 39

% chg qoq (8.3) 244.7 (30.4) (42.8) (31.4)

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 778 826 1.1 107 / 33 199,090 2 18,755 5,698 DISH.BO DISH@IN

For 2QFY2013, Dishman Pharmaceuticals & Chemicals (Dishman) reported below expected sales, while net profit came in above expectations. The sales and net profit came in at `289cr and `27cr, vs our expectation of net sales and profits of `322cr and `19cr respectively. On the positive side, the company posted good expansion in the operating margins. We recommend a Buy rating on the stock. Better than -expected net profit during the quarter: Dishman reported net sales of `289cr during 2QFY2013, reporting a growth of 7.5% yoy and below our estimate of `322cr. Segment wise, the CRAMS business grew by 12% yoy, whereas the market molecules (MM) business came in flat at `101cr. Gross margin for the quarter expanded significantly to 70.0% (63.7% in 2QFY2012). The OPM expanded to 20.1% (10.5% in 2QFY2012). This has lead to the company reporting a net profit of `27cr as compared to the loss of `6cr during the corresponding period of last year. Outlook and valuation: We expect Dishmans net sales and net profit to come in at `1,536cr and `116.9cr, respectively, in FY2014. At current levels, Dishman is trading at 9.3x and 6.7x FY2013E and FY2014E earnings, respectively. We believe the current valuations are attractive, hence, we maintain our Buy recommendation on the stock with a target price of `145.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 61.4 18.2 7.3 13.1

Abs. (%) Sensex Dishman

3m 8.9 73.7

1yr 7.4

3yr 18.0

(9.3) (57.7)

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

FY2011 991 8.2 80.0 (32.0) 9.9 16.4 9.7 9.6 5.5 0.9 1.6 9.9

FY2012 1,124 13.4 56.9 (28.9) 7.0 20.0 13.7 6.3 7.9 0.8 1.4 7.1

FY2013E 1,280 13.9 83.9 47.6 10.4 20.2 9.3 8.7 9.0 0.8 1.3 6.4

FY2014E 1,536 20.0 116.9 39.3 14.5 20.2 6.7 11.0 10.6 0.7 1.1 5.4

Sarabjit Kour Nangra

+91 22 3935 7800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Dishman | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 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 EPS (`)
Source: Company, Angel Research

2QFY2013 289 9 298 203 70.0 58 20.1 13 20 34 7 27 27 3.3

1QFY2013 315 3 318 231 73.3 84 26.5 23 19 44 5 39 39 4.8

% chg qoq (8.3) 244.7 (6.2) (12.4) (30.4) (42.8) 5.5 (23.1) 40.8 (31.4) (31.4)

2QFY2012 269 0 270 172 63.7 28 10.5 15 21 (7) (1) (6) (6) -

% chg yoy 7.5 1,868.8 10.6 18.1 105.9 (12.0) (1.4) -

1HFY2013 605 7 612 434 71.7 146 24.2 36 40 77 12 65 -

1HFY2012 506 4 510 331 65.4 91 18.0 46 39 10 1 9 0 9 1.1

% chg 19.5 65.3 19.9 31.0 60.7 (21.4) 1.0 688.3 1,043.4 645.3

65 8.1

648.7

Exhibit 2: 2QFY2013- Actual Vs Angel estimates

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

Actual
289 9 58 13 7 27

Estimates
322 0 66 23 5 19

Variation
(10.2) (11.8) (42.7) 39.3

Revenue boosted by the CRAMS business: Dishman reported net sales of `289cr during 2QFY2013, reporting a growth of 7.5% yoy and below our estimate of `322cr. Segment wise, the CRAMS business grew by 12.0% yoy, whereas the market molecules (MM) business was flat. Carbogen Amcis reported a good operating performance, recording an EBIDTA of 18.0% (7.2%). On the sales front, the company posted a sales growth of 5.9% yoy to `105.1cr. On the other hand, Dishman Nertherlands posted a sales growth of 54.7% yoy to `52cr. On the operating front, the margins improved to 32.1% vs 15.9% during the corresponding period of last year.

November 2, 2012

Dishman | 2QFY2013 Result Update

Exhibit 3: Sales trend

400 350 300 250 269 265 350 315 289

(` cr)

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

Source: Company, Angel Research

OPM expansion continues: During the quarter, the gross margin expanded significantly to 70.0% (vs 63.7% in 2QFY2012). The OPM expanded to 20.1% (vs 10.5% in 2QFY2012). The expansion in the OPM was aided alone with the GPM expansion, along with lower (9.0% yoy growth) of other expenditure.

Exhibit 4: OPM trend

28.0 26.0 24.0 22.0 26.5

(%)

20.0 18.0 16.0 14.0 12.0 10.0 2QFY2012 10.5

18.3 17.8

20.1

3QFY2012

4QFY2012

1QFY2013

2QFY2013

Source: Company, Angel Research

Net profit better than expectation: During the quarter, the company reported a net profit of `27cr as compared to a loss of `6cr during the last corresponding period. The operating profit rose by almost 105.9% yoy, along with the other income of `9cr (vs `0.5cr during the corresponding period of last year).

November 2, 2012

Dishman | 2QFY2013 Result Update

Exhibit 5: Net profit trend

50 40 31 30 27 17 39

(` cr)

20 10 0 2QFY2012

3QFY2012

4QFY2012

1QFY2013

2QFY2013

(10)

(6)

Source: Company, Angel Research

Concall highlights:
The company has guided for a top-line of around `1,200-1,300cr with an EBIDTA margin of 22-23% for FY2013. The PAT is expected to be in excess of `90cr in FY2013. For FY2013, the management stated that Carbogen Amcis (CA) is expected to contribute CHF85-95mn in sales with EBITDA at 12%. Currently CA has a total order book of Euro20mn and the company expects to start executing orders from January 2013. The tax rate has been guided at ~20-25% for FY2013.

Investment arguments
Capex benefits to accrue: Dishman is well placed to benefit from the organic capex of ~`300-`400cr incurred over the last four years towards building new facilities and expansion of other existing facilities. Post the new facilities getting operational, Dishman is likely to enter into long-term API supply contracts with these players, thereby resulting in stable revenue flow going ahead. The companys ties with global innovators would also strengthen apart from reducing its dependence on Abbott. CRAMS back on track: Abbott has been one of Dishmans key clients. As per a long-term contract, Dishman primarily supplies Eprosartan (Teveten) API to Abbott. The revenue from the contract has risen at a CAGR of 36.1% to `174.0cr over FY2007-09, driven by increasing offtake of Eprosartan, resulting in higher margins. However, during FY2010, key products of Solvay Tricor and Teveten, declined on account of inventory rationalization in the channels and acquisition by Abbott. With the global inventory rationalization nearing its end and the acquisition of Solvay by Abbott now completed, the contract is normalized. For FY2013, the Abbott contract is expected to grow by 10-15%. Further, a healthy order book position in CRAMS would aid the segment to post a growth of 15%.

November 2, 2012

Dishman | 2QFY2013 Result Update

Outlook and valuation

We expect Dishmans net sales and net profit to come in at `1,536cr and `116.9cr, respectively, in FY2014. At current levels, Dishman is trading at 9.3x and 6.7x FY2013E and FY2014E earnings, respectively. Despite being conservative on the margin front, we believe the current valuations are attractive. Hence, we maintain our Buy recommendation on the stock with a target price of `145.

Exhibit 6: One-year forward PE

Source: Company, Angel Research

Exhibit 7: Recommendation summary

Company Alembic Pharmaceuticals Aurobindo Pharma Sanofi India* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Neutral Accumulate Accumulate Accumulate Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral CMP Tgt. price Upside (`) 68 158 2,216 861 364 1,757 96 1,999 65 459 567 104 526 694 (`) 91 953 399 1,859 145 92 485 647 % PE (x) 34.5 7.4 - 12.6 - 21.2 10.7 18.7 9.8 18.2 5.8 18.9 51.0 42.6 6.7 7.3 - 24.3 5.6 12.3 14.2 18.2 4.7 - 17.5 - 24.6 FY2014E EV/Sales (x) 0.8 1.2 2.8 2.5 3.1 2.7 1.1 4.7 0.9 1.8 2.5 0.8 1.9 4.7 EV/EBITDA (x) 5.0 8.0 17.8 12.7 13.7 13.0 5.4 15.1 5.9 8.5 12.7 5.5 11.8 11.4 FY12-14E 14.8 61.1 12.0 20.5 18.4 2.3 43.4 8.7 32.8 30.6 26.5 27.8 44.8 0.1 FY2014E 29.4 10.4 16.1 20.2 16.8 15.1 10.6 38.9 15.5 26.1 22.5 11.5 15.8 26.7 30.0 16.4 17.0 26.8 16.6 20.8 11.0 29.0 17.0 26.0 24.7 7.9 28.9 18.8 CAGR in EPS (%) RoCE (%) RoE (%)

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.
November 2, 2012

Dishman | 2QFY2013 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) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 1,070 8 1,062 1,062 32.3 786 330 73 273 110 276 80.5 26.0 63 213 101.6 20.1 46 (10) 157 28.2 157 10.7 6.8 147 1 146 146 22.1 13.8 18.1 18.1 20.6 928 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 38.4 20.0 77 148 58.3 13.2 73 13 14.7 88 (4.6) 88 31.2 35.4 57 (0) 57 57 (28.9) 5.1 7.0 7.0 (28.9) FY2013E 1,290 10 1,280 1,280 13.9 1,021 376 95 345 205 259 15.3 20.2 79 180 21.7 14.1 81 13 11.5 112 27.3 112 28.0 25.0 84 84 84 47.6 6.6 10.4 10.4 47.6 FY2014E 1,548 10 1,536 1,536 20.0 1,225 451 114 415 246 311 20.0 20.2 85 226 25.4 14.7 83 13 8.3 156 39.3 156 39.0 25.0 117 117 117 39.3 7.6 14.5 14.5 39.3

November 2, 2012

Dishman | 2QFY2013 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 Advances Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1 685 45 187 453 228 457 1,459 1 588 45 187 355 200 388 1,590 798 195 603 223 175 932 248 684 357 159 1,161 328 833 307 179 178 1 583 43 98 443 260 323 1,821 1,264 440 824 418 209 155 26 626 24 146 515 326 301 1,933 1,364 519 845 418 209 179 26 762 11 165 586 384 378 2,057 1,464 603 861 418 209 215 26 916 14 198 704 461 455 2,184 21 1,459 32 1,590 16 2 696 714 724 16 8 761 785 774 16 2 861 879 869 6 35 32 1,821 16 2 914 932 850 66 41 45 1,933 16 2 988 1,005 900 66 41 45 2,057 16 2 1,094 1,112 920 66 41 45 2,184 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

November 2, 2012

Dishman | 2QFY2013 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 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 157 63 (65) 36 (14) 105 (174) 0 36 (139) 2 94 (9) (45) 41 8 37 45 133 59 69 27 (3) 231 (269) (0) 27 (242) 50 (11) (28) 11 (0) 45 45 92 69 (116) 40 (11) (6) (178) 0 40 (138) (6) 95 (9) 60 140 (3) 45 43 88 77 (55) 13 (31) 66 (215) 0 13 (202) 47 (10) 81 118 (18) 43 24 112 79 (32) 13 (28) 118 (100) 13 (87) 50 (10) (84) (44) (13) 24 11 156 85 (73) 13 (39) 115 (100) 13 (87) 20 (10) (35) (25) 3 11 14

November 2, 2012

Dishman | 2QFY2013 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 2.5 4.6 0.9 3.6 3.7 0.9 5.1 2.2 0.9 3.7 2.0 0.9 3.4 2.2 0.8 2.9 2.7 1.5 105 56 51 130 1.1 109 52 56 150 0.9 94 53 56 115 0.9 96 53 48 90 1.0 99 47 45 92 1.1 89 41 37 96 15.9 22.5 22.7 9.5 14.1 15.7 5.5 8.1 9.6 7.9 11.5 6.3 9.0 13.3 8.7 10.6 15.2 11.0 20.1 93.2 0.8 15.3 6.3 1.0 24.2 15.8 88.8 0.6 8.7 4.6 0.9 12.5 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 14.1 75.0 0.6 6.8 6.9 0.9 6.7 14.7 75.0 0.7 8.0 6.8 0.8 9.1 18.1 18.1 25.9 1.2 88.5 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 10.4 10.4 20.2 1.1 124.6 14.5 14.5 25.0 1.1 137.8 5.3 3.7 1.1 1.2 1.4 5.3 1.0 6.6 4.4 1.0 1.2 1.6 7.4 0.9 9.7 5.2 0.9 0.9 1.6 9.9 0.9 13.7 5.8 0.8 1.0 1.4 7.1 0.8 9.3 4.8 0.8 1.1 1.3 6.4 0.8 6.7 3.9 0.7 1.1 1.1 5.4 0.8 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

November 2, 2012

Dishman | 2QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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%)

November 2, 2012

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