Buy Dishman Carbogen Amcis For 133% Gain: Nirmal Bang

Dishman Carbogen Amcis Management Call Update

We hosted a concall with Dishman Carbogen Amcis ltd management with institutional Investors considering the recent steep correction in stock price post week long IT search operations conducted at various company premises. Overall the company does not anticipate a materially adverse outcome from the IT investigation and reinstated its commitment to highest standards of corporate governance and ethics. From a business perspective they also reinstated their guidance for 8-10% revenue growth and EBITDA margins around 27%.

IT search operations were done very courteously and the company extended full cooperation to the IT officials. The data needs of the IT department could be immediately addressed as they have made good progress towards complete automation of accounts. The search operations were unanticipated as there was no prior tax demand notice that was received.

Dishman Carbogen Pharma – DCAL (Stock hit lower circuit of 20% today)

Motilal Oswal AMC sells 8.1 lakh shares at Rs 73.62 per share

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Transfer pricing, goodwill amortization were among the few aspects explored during the search operations. With regard to transfer pricing, the company has indicated in most geographies they operate in are at more or less the same tax rate. Like in India they are under MAT (20%), and likewise the tax rate in UK, Switzerland, and Nederland are also 19%, 20%, and 25% respectively. The IT search did not extend to other promoter group entities. It lasted almost a week long as the officials had follow up requirements of data, which was furnished to their satisfactions.

The search operations had no impact on the routine business operations and customer shipments were released on schedule. Revenue growth guidance of 8-10% for FY-20 has been maintained. EBITDA margins should be in the range of 27%. EBITDA margin expansion will be gradual and they expect a 300bps expansion over next 3 -5 years.

Fundamentally, company continues to have a robust standing in the CRAMS space. The custom synthesis pipeline has around 500 molecules, which is larger than most competing players at the global level. The Phase 3 pipeline is also very strong with 18 molecules, of which about 4 are in validation stages, which ensures the company can continue to build its commercial manufacturing revenue stream in the near to medium term.

Within the Phase 3 pipeline there are two Anti body Drug Conjugates as well which requires niche development skills and DCAL has been able to build early capabilities. Orders for niraparib, one of their key molecules in commercial manufacturing has stalled for a while, as there is inventory buildup. Approval for niraparib in new indications should bring back demand. With regard to Vitamin D business, the company continues to build new avenues of growth by investing in capacities, improving process to lower costs and forward integrating to formulations.

Other Business Updates

Moving to New Tax regime should reduce tax outgo:

Company would be adopting the new tax regimen from FY21 onwards and this should lower their tax outflow. The reported tax rate would stand at 25%, but the cash outgo would be nil.

Capacity Utilization:

The gross block currently on the books of the Company is Rs20,000mn and the Company has Fixed Asset turnover of around 0.9. The capacity utilization for the sites is Switzerland – 85%, Bavla -65%, China – 25%, Netherlands- 60% and Manchester – 75-80%.

Debt:

The Company has net debt of Rs8,000mn which is on a higher side due to front ended CapEx. The Company will continue to lower debt. In first six months of FY20 debt was lowered by $8mn