Dishman Carbogen Amcis Ltd. share price target

Re-iterate BUY with a revised TP of Rs 450 (12x FY20E EV/EBITDA). On the back of fall in market molecule revenues and capacity constrains at Switzerland entity, DCAL reported sequentially flat top line at Rs 4.5bn. It was down 16%YoY on a high base. EBITDA margin was steady at 26.8% (up 47bps YoY and down 63bps QoQ). This was primarily owing to an unfavorable business mix, which led to a decline in gross margin level (~164bps YoY). Employee cost was also higher at Rs 1.7bn, up 8% QoQ. PAT came in at Rs 511mn, 8% below estimates, but up ~20% YoY, aided by higher other income and relatively lower taxes.

Maintain BUY with a TP of Rs 480 (12x FY20E EV/EBITDA). As per the recent updates from Tesaro (one of the key clients of Dishman Carbogen), Niraparib has met the primary end point in QUADRA clinical trial for 4th line of treatment in ovarian cancer. It enables Tesaro to market Niraparib for late phase ovarian cancer treatments (4L+). Effectively, it will increase the volumes for Tesaro and Dishman carbogen both.

Top picks: CDH, ALKEM, DCAL, NLL After reporting two better quarters, we expect the top line for our pharmaceutical coverage universe to decline 2-3% QoQ while EBITDA margin is likely to remain steady at 21% in 4QFY18. Within the sector, considering the seasonality in the business, only CRAMS companies are likely to report sequential improvement. Most of the US focused formulation companies will report single digit decline in the top line and earnings are likely to be better sequentially due to low base of 3QFY18 (hit by US tax adjustments). Although YoY performance appears much better (Revenues Up 3%YoY and EBITDA Margin up 170bps YoY), structural issues like unfavorable US pricing environment, pending plant clearances and low visibility on the lucrative approvals are still dominating. We continue to believe that the US generic businesses are not completely out of the woods and will need more time to recover.

Total revenues for Q3FY18 were at Rs4.3bn (est. Rs4.8bn) were up 20.9% YoY and remained flat on a QoQ basis. Gross margins dipped to 76% lowest since Q1FY16, we expect these to ramp up to ~80% going forward. PAT was up 27.8% at Rs420mn...

Maintain BUY with a revised TP of Rs 480 (12.5x Dec-19E EV/EBITDA). DCAL reported a strong top-line but lower margins in 3QFY18. Revenue grew 27% YoY to Rs 4.6bn (in-line with estimates), and EBITDA came in at Rs 1.2bn, up 22% YoY. However, there was a miss at the margin level, with the EBITDA margin coming in at 26.4%, down ~100bps YoY. This was primarily owing to an unfavourable business mix, which led to a decline at the gross margin level (~460bps YoY). The lower margin Carbogen Amcis pie contributed 62% of the top-line in 3QFY18 (vs 49% in 3QFY17) and the high margin India CRAMs segment contributed 10% (vs 15% YoY), causing the margin decline. PAT came in at Rs 420mn, below estimates, but up ~29% YoY.

Strong financials: With the improved product mix, capacity utilization, commercial manufacturing of some APIs for a high-margin products and financial cost savings to help improve the EBITDA margins going forward. We expect Dishman's revenues/EBITDA/Net Profit to grow at a CAGR of 15%/18.7%/36.4% respectively over FY17-20E on the back of better utilization of capacities, increased revenues from high-margin HIPO APIs and Vit-D analogues. Valuation: We initiate coverage on Dishman with a BUY and a target price of Rs412,...

At CMP, DCAL is trading 9.1x FY19 EBITDA and 7.2x FY20E EBITDA, at ~25% discount to the sector average. Foresee 13% revenue CAGR and 36% earnings CAGR over FY1720E. Maintain BUY. One of the molecules from Dishman Carbogen Amcis (DCAL) pipeline, crenolanib (disclosed by us in our IC note Highly potent), has received fast track designation from the US FDA for the indication of relapsed or refractory (R/R) acute myeloid leukemia (AML). A drug program with Fast Track status is afforded greater access to the FDA for the purpose of expediting the drugs development, review, and potential approval.

At CMP, DCAL is trading 9.1x FY19 EBITDA and 7.2x FY20E EBITDA, at ~25% discount to the sector average. We value DCAL at 11x EV/EBITDA (Sep-19E) to arrive at a TP of Rs 410. We have changed our valuation methodology (prev. P/E multiple), as the higher amortisation costs post-merger are non-operating and non-cash in nature. Dishman Carbogen (DCAL) bounced back with strong numbers in 2QFY18. Sales from orders deferred in 1QFY18 propelled DCAL to report higher revenues, while resulting operating leverage led to the margin expansion. DCALs flagship potent oncology product, Niraparib, was commercially launched by the partner in the US during the quarter. However, we believe that this is only the beginning!

Initiate coverage with a BUY rating and a TP of Rs 405 (20x on Sep-19E EPS), implying ~35%+ upside. With strong visibility on commercial launches and future orders, Dishman Carbogen Amcis (DISH) will finally see its efforts culminating in sustainable growth starting FY18. Seeds that were sown six to seven years ago are now yielding results. Apart from Niraparib, there are three to four potential launches in FY18, which will not only accelerate growth, but also de-risk earnings from blockbuster products. Altogether, there are 25 candidates in Phase III, and we expect four to five products to be commercialised every year. This provides great comfort that momentum will be maintained even after FY20. In our estimates, we have built in only six commercial launches (five in FY18 and one in FY19) and 5 to 6% growth in the base business, leading to ~14% revenue CAGR, ~18% EBITDA CAGR and ~38% earnings CAGR over FY17-20E.