Buy Dishman Carbogen Amcis, target Rs 415: HDFC Securities

HDFC Securities has a buy call on Dishman Carbogen Amcis (DCAL) with a target price of Rs 415.

The current market price of Dishman Carbogen Amcis is Rs 246.50.

Time period given by the brokerage is one year when Dishman Carbogen Amcis price can reach the defined target.


View of the brokerage on the company:
DCAL’s 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 (nearly 56 per cent of revenues) and reduced supplies of old products like Eprosartan from India.

However, it started the supplies of Niraparib API to a CRAMS partner in FY18, which is expected to become a blockbuster product globally. Going ahead in FY19, we expect DCAL to benefit from the falling rupee, expanded development capacity, ramp up in commercial supplies and improved profitability of Vitamin D business.

Remain constructive on its CRAMS thesis with 15 novel molecules in late phase III for its partners. Maintain BUY with a target price of Rs 415 (11x EV/EBITDA).

Focus on cost optimization: AR highlights that DCAL has reduced SG&A spend from 11.3 per cent (of sales) in FY17 to 8.0 per cent in FY18, showing a decline of Rs 380mn. Along with cost optimization, the management expects their efforts on rationalization of non-profitable orders, better pricing environment in Vitamin D, increased commercial sales and optimal utilization of Chinese plant to drive higher margins in coming years.

Net Debt/Equity lowered to 0.5x: 60 per cent of DCAL’s total debt in FY18 is denominated in foreign currency at LIBOR+1.5 per cent rate, up from 30 per cent in FY15. This has resulted in a 45 per cent reduction in interest cost from Rs 900mn in FY15 to Rs 490mn in FY18. DCAL intends to further lower its debt over the next two years. As per the current debt schedule, Rs 5.2bn is long-term in nature (48 per cent of total debt) while 80 per cent of this is repayable over FY19-21. Overall, Net Debt/Equity ratio lowered from 0.6x in FY17 to 0.5x in FY18 (adjusted for goodwill of Rs 35bn).

Increased capex hurt FCF: OCF has typically been maintained at Rs nearly 2.9bn over FY15-17. However, higher working capital and an increase in capex from Rs nearly 1.3bn over FY15-17 to Rs 2.2bn in FY18 eroded FCF down to Rs 100mn in FY18 (Rs nearly 1.5bn over FY15-17).

Strong hedging policies: Hedge positions have been increased significantly over the year as forward covers amounting to Rs nearly 3.8bn in FY17, have jumped to Rs nearly 11.5bn in FY18 (nearly 70 per cent of sales).

No dividend was proposed for FY18 by the management. The company could use other means to compensate for lack of dividend in FY18.