Dishman Carbogen Amcis Ltd. share price target

DCAL Q4FY20 revenue came 22.8% below our estimate at INR 5,121mn (est. INR 6,637mn) decline by 21.2% YoY due to tapered growth in CRAMs business (-18.3% YoY), lower other operating income (INR 93mn vs INR 383mnin Q4FY19) and postponement of commercial supply (USD ~5mn) to Q1FY21. CRAMS India revenues de-grew by ~30% YoY and accounted for 18% of the revenue. Car- Sector Outlook bogen Amcis BV revenues declined by 11% YoY. EBITDA margins contracted from 26.1% to 25.8%...

er depreciation on account of IndAS 116 adoption. Management kept their revenue growth guidance Target Price (INR) unchanged at 8-10% YoY with EBITDA margin between 26%-27% for FY20E. On tax rate front, man- BSE code agement has guided for 25% tax rate from next year as the company adopts the new tax regime. As we witnessed, better recovery in H2 in last two year, we expect this trend to continue this year as well...

Total Revenues for the quarter grew by 4% to Rs 4673 mn, which includes Rs 175 mn of other operating income.

We expect a steady growth in earnings over the next couple of years (earnings CAGR of ~16.2% in FY19-21E versus ~13.1% (incl. amortization of goodwill) in FY13-19), which will aid to generate sizable cash flows. Apart from Niraparib, the visibility of new products has increased with 3 products filing from customers, which will not only accelerate growth, but also de-risk earnings from blockbuster products. The emerging signs of a recovery in Carbogen, bright prospects from Vitamin D business,...

We remain constructive on DCAL owing to strong visibility on its order book, 15+ late phase 3 molecules, expanded development capacity, ability to work on new molecules like ADCs, and favorable currency. Improvement in BS driven by reduced debt and working capital release would be one of the important parameters to drive re-rating of the stock. At CMP, the stock is trading at 10.1/7.8 FY19/20E, a ~60% discount to peers like Divi's Labs. Maintain BUY with a TP of Rs 350 (15x FY21E EPS). DCALs FY19 annual report reflects pleasing YoY progress on key P&L; metrics like revenue (+22%), EBITDA margin (+50bps) and earnings (+26%), which is attributed to the surge in revenues from India CRAMS and Vitamin D segments. The operational performance of FY19 was largely in-line with our estimates at the beginning of the fiscal. However, improvement in the BS and CF remained slow as the elevated capex and higher working capital led to negative free cash flows and only a 6% reduction in net debt. DCAL is expected to compensate for the lack of dividend over the last two years in FY20E.

DCAL Q1FY20 revenue came below our estimate at INR 5,219mn (est. INR5,461mn) Up 8.2% YoY due to flat revenue growth from Carbogen Amcis AG with 52% contribution in Q1 revenues. CRAMS India revenues grew by 28% YoY and accounted for 15% of the revenue. Carbogen Amcis BV revenues increased by 8.6% YoY on account of better sales of Vitamin D analogues and cholesterol....

The volatile quarterly performance is inherent to CRAMS business models. So, it would be inappropriate to extrapolate this quarter's performance to the full year of FY20E. Historically, both in FY18 & FY19, operational performance has recovered strongly in 2H. This year too, on the back of higher commercial orders in India and Swiss coupled with the new development capacity, we expect the company to overshoot its guidance of 10% YoY revenue growth and 26-27% EBITDA margin. Expect 19% EPS CAGR over FY19-21E. Unlike generic pharma companies, this business is more sustainable and insulated from pricing pressure until patent expiry. Hence, DCAL merits a higher multiple as it is trading at 10.1/7.9x FY20/21E EPS, a ~60% discount to peers. We maintain a BUY on DCAL following a disappointing quarter. Our TP is revised to Rs 355 (15x FY21E EPS) with a 5% cut to FY21E EPS (higher depreciation expectation).

DCAL is the only listed company in India that manufactures complex commercial APIs for innovators in small to large scale. For institutional investors, it is a structural, long-term story with a growing visibility on commercial pipeline, strong base of pre-clinical/phase I molecules (250+) and improving business fundamentals. Unlike generic pharma, this business is more sustainable and insulated from pricing pressure until patent expiry. Hence, DCAL merits a higher multiple as it is trading at 10.2/7.9x FY20/21E EPS, a ~60% discount to DIVI. The co has ended FY19 with 22/24/26% revenue/EBITDA/EPS growth and overshot its guidance by 10% on top-line. Going into FY20/21E, we expect top-line growth to be maintained at ~11% CAGR and earnings to grow at ~26% We maintain a BUY on DCAL following a strong beat on our 4QFY19 estimates. Our TP is unchanged at Rs 400/sh (15x FY21E EPS).

DCAL Q4FY19 revenue came substantially above our estimate at INR 6,497mn (est. INR4,515mn) Up 43.9% YoY lead by strong revenue growth from CRAMS (India) and Vitamin D business. CRAMS India revenues grew by 49% YoY and accounted for 21% of the revenue. Carbogen Amcis revenues grew by 31% with 51% contribution in Q4 revenue. Carbogen Amcis BV revenues increased by 65.7% YoY on account of strong sales of Vitamin D analogues and cholesterol. EBITDA margins declined from 26.8% to 26.1% (est.28.3%) on a YoY basis led by higher other expenses mainly due to the impact of foreign currency translation (INR200mn) and higher repairs & maintenance cost. PAT...

Maintain BUY with a TP of Rs 380 (15x Dec-20E EPS). While Dishmans (DCAL) 3Q performance was ahead of our estimates, revenue growth was muted as a large chunk of orders was shifted over to 4Q. Despite revenue growth being limited to 4/7% YoY/QoQ, a shift in business mix towards high-margin segments (CRAMS India and Vit. D) led to a 750bps YoY expansion in gross margin (up to 85% in 3Q) and a 10% YoY growth in EBITDA (despite higher opex), with margin at 27.7% (+136bps YoY).

We expect this to not only drive further growth and profitability, but also reduce dependence on single blockbusters (like Niraparib), leading to lower earnings risk. We re-iterate our positive stance on the company and maintain BUY with a TP of Rs 355 (15x Sep'20E EPS). One of DCALs US based clients is preparing to commercialize an antibiotic product in Feb-19. The product was approved by the US FDA in Oct-18 for the indication of community-acquired bacterial pneumonia (CABP) and acute bacterial skin infection (ABSSSI). This will be the third commercial launch from DCALs pipeline over FY18-19. We believe DCAL could generate annual revenue of US$ 4-5mn in the initial years.

Maintain BUY with a TP of Rs 350 (15x Sep-20E EPS). Dishman (DCAL) saw an in-line quarter with revenue at Rs 4.5bn (+1/-7% YoY/QoQ) driven by growth in the domestic business and Vitamin D segment. Gross margin expanded 250/740bps YoY/QoQ to 84.6% led by favorable forex and improved business mix. As a result, EBITDA margin jumped to 28.7% (up 368bps QoQ). PAT was at Rs 440mn, down 9% YoY, dragged by higher taxes, which includes Rs 70mn related to tax paid on subsidiary dividend.

Maintain BUY with a TP of Rs 415 (11x EV/EBITDA). DCALs FY18 annual report highlights its focus on cost optimization, improving business mix, commitment to reduce debt, strong hedging policies and reduced free cash flow due to higher capex in FY18. The revenue, EBITDA, and PAT largely remained flat in FY18 owing to fully utilized developmental capacity in Switzerland entity (~56% of revenues) and reduced supplies of old products like Eprosartan from India.

Source: Capital Line, ICICI Direct Research; *FY15 and FY16 financials are for Dishman Pharma and Chemicals Ltd We met the management of Dishman Carbogen Amcis (Dishman) and also visited its key high potent (Hipo) oncology plant at Bavla, Gujarat, to gain an insight into the company's contract research & manufacturing (CRAMs) business. Incorporated in 1983, Dishman is a fully-integrated CRAMS player (76% of FY18 revenues) for new chemical entities (NCEs) molecules. It has a presence across the CRAMs value chain from process...

Maintain BUY with a revised TP of Rs 440 (11x FY20E EV/EBITDA). DCAL delivered improved performance in 1QFY19 with revenue at Rs 4.8bn, up 42%YoY on a low base and up 7%QoQ. EBITDA margin recovered 400bps YoY to 25%, while dropping 200bps sequentially. The sequential drop was primarily owing to an increase in other expense and no reduction in employee cost. PAT at Rs 396mn was up 205%YoY owing to a low base, and down 22%QoQ due to decline in other income and higher interest cost.

Dishman Carbogen Amcis's (Dishman) Q1FY19 revenue was a marginal miss but EBITDA/PAT were below our estimates by 31.9%/24.7%. Sales grew 32.6% YoY to Rs4.5 bn while EBITDA/PAT increased 26.7%/204.5% to Rs872/396 mn.EBITDA margins...

We believe FY19 may see a gradualcomebackfor large cap pharma companies, driven by (1) Actual and likely regulatory resolutions, (2) Moderating price erosion and (3) Several product launches across generic and specialty categories in 2HFY19. For the first time after six consecutive quarters, the pharma companies under our coverage will report double digit YoY growth (~13%) in revenues. EBITDA and PAT will grow at 25% and 28% YoY respectively. However, this growth is on the favorable base of 1QFY18, which was affected by GST disruption. Sequentially, revenues, EBITDA and PAT are likely to remain flat due to lack of lucrative approvals in the US and continued investment for specialty business. Within the sector, depreciated rupee is likely to benefit CRAMS companies like DIVIS and DCAL. Most of the US focused companies will report flat sequential growth and steady EBITDA margin