Dishman Carbogen Amcis Research Report By Nirmal Bang

Continues To Build Strength And Scale In CRAMS Business

Dishman Carbogen Amcis’ or DCAL’s 4QFY19 revenues at Rs6,497mn were 25.4% above our estimate. Revenues were up 43.1% QoQ and 35.1% YoY. CRAMS business revenues (Rs. 4791mn) were up 41.3%/39.8% QoQ/YoY, respectively. The marketable molecule revenues (Rs. 1395mn) were up 49.4% QoQ at Rs14bn.

CRAMS revenues were positively impacted as commercial orders for API’s were bunched up during the quarter. The Vitamin D business was favorably aided by expansion into new markets. The company is leveraging its internal low-cost manufacturing technology to expand the end use of its Vitamin D products. During the quarter, the company has commercialized its new custom synthesis facility in Switzerland, which should start incrementally contributing to revenues in FY20.

The peak revenues from the facility should be around US$10mn. The commercial manufacturing business should expand as around three molecules that have been filed for approval by its clients are awaiting regulatory nod.

EBITDA stood at Rs1,694mn, which was 12.1% above our estimate. EBITDA grew 27.6% QoQ and 39.8% YoY. EBITDA was adversely impacted by higher employee expenses (up 12% QoQ) and other expenses which were up 4.5% QoQ. Employee expenses include around Rs100mn in annual bonus. EBITDA margin stood at 26.1%. Net earnings at Rs758mn were up 47.5% QoQ and 48.2% YoY.

Net earnings were above our estimate by 19.9%. Net earnings adjusted for amortisation of goodwill arising from the reverse merger was Rs670mn, which translates into an adjusted EPS of Rs4.2.

We have retained Buy rating on DCAL with a target price of Rs425 (from Rs446 earlier) at an EV/EBITDA multiple of 11x.

Outlook and valuation:

The stock trades at a steep discount to its peer group, despite very strong earnings momentum. We believe that investors should focus on adjusted earnings as reported earnings are unduly depressed by amortisation charge on the goodwill created out of reverse merger with its own subsidiaries.

The earnings momentum in DCAL will be driven by:

1) Continued growth in commercial manufacturing API sales through volume growth and product sales.

2) New commercial manufacturing opportunities. We expect one to three new commercial manufacturing opportunities annually.

3) Ramp-up of custom synthesis facility should add around Rs2,100mn when operating at full capacity (FY21E).

4) Ramp-up in Vitamin D sales as the company continues to explore new application/markets for its product line. It is developing soft gel capsules containing Vitamin D and has developed a low-cost process for manufacturing a starting material for Vitamin D which will be leveraged for expanding Vitamin D business scope to feed and nutrition.

5) In the medium to long-term, the company will also be in a position to monetise its developmental efforts in the API space where it is focusing on niche molecule dyes for imaging (Isosulfan Blue, Indocyanine Green, Indigo Carmine, and Methylene Blue).