Investment Idea

12th June 2009

Surya Narayan Patra

surya.patra@relianceada.com
Orchid Chemicals & Pharm. BUY
+91 22 42171214
Orchid Chemicals & Pharmaceuticals (Orchid) is an integrated pharmaceutical
Vinod Pushpanathan company with core competencies in the cephalosporin injectable space and
vinod.pushpanathan@relianceada.com that too in regulated markets of US. Having an established strong base in US
+91 22 42171211 cephalosporin segment, the company is now spreading its wings to other
regulated markets like Europe and Canada. Further the company is progressing
well in the non-penicilin, noncephalosporin (NPNC) and drug discovery front.
Price: Rs.134
12M Target Price: Rs.176 Tazo+Pip to power earnings ahead
Orchid has recently commenced the comercial launch of Tazobactum &
% Upside / (Downside) 31% Pipperacillin (Tazo+Pip) injection (the generic version of Wyeth’s Zosynin) in
Europe during Q4FY09, with an addressable market of $250mn for Orchid. This
product has limited competition with just two generic competitors like Sandoz
Stock details and APP pharmaceutical. Given by the fact and Orchid’s well planed marketing
pact with one of the leading marketers like – Hospira, We estimate Tazo+Pip
BSE Code 524372 injection in Europe bring incremental revenue about $35-40mn during FY10.
Nse Code ORCHIDCHEM Further, it foresees the launch of Tazo+Pip injection in US by Q2FY10 with another
Reuters Code ORCD.BO $250mn opportunity. These two launches would boost the revenues as well as
Bloomberg Code OCP IN margin going forward.
Market Cap (Rs.bn) 9.2
Free Float 77.8 Strong pipeline opportunities to drive growth
52-wk Hi/Lo (Rs) 330/66.85 Alongside, Orchid is expected to launch approximately 12 to 13 products with
Avg Daily Vol (BSE) 88468 market size worth $2.6 billion in U.S. and Europe together in 1-2 quarters time.
Avg Daily Vol (NSE) 290787 On a longer term perspective, Orchid has the pipeline of Carbopenems (like -
Shares o/s (mn) FV Rs.10 70.9 Imipenem + Cilastatin, meropenem), which are over $1billion opportunity and
Source:Reliance Money Research Ranbaxy is the only known competitor in the space, that would trigger the earnings
late FY10 onwards. Also, Orchid holds 5 First-to-file opportunities for
Desloratidine-ODT and ER, Ibandronate, Memantine and Gemifloxacin, would
maintain the growth momentum for the company beyond 2010. however, we
9mFY09 Performance have not factored Carbopenem and FTF opportunities in model yet and they
Rs Mn 9mFY09 9mFY08 YoY (%) remain surprising earning triggers.
Net Sales 9883.5 8619.7 14.7
Raw Material 4076.8 2873.8 41.9 FCCB Buy back and revised AS-11 to improve earning
Staff Cost 971.9 864.2 12.5 predictability
Other Expenditure 2381.6 2725.6 -12.6 Orchid has recently bought back FCCBs worth $40mn (at a discount of above
Total Expenditure 7430.3 6463.6 15.0
40%). This would enhance the clarity on profitability front by reducing the possibility
forex loss led by currency fluctuation. On the top of that, the forex translation
Operating Profits 2453.2 2156.1 13.8
losses, as per the new AS-11, would not impact the earnings rather would be
OPM (%) 24.8 25.0 (20bps)
reported directly in balance sheet. Thus, Going forward we do not factor forex
Other Income 471.4 465.5 1.3
translation differences a cause of concern, which has been the major
Interest 1003.0 577.6 73.6 performance dampener in 9mFY09.
Depreciation 989.3 707.5 39.8
PBT 932.2 1336.4 (30.2) Steady improvement in financials
EO - (Income)/Expenses 1715.3 (790.5) PL During 9mFY09, Orchid reported 15% revenue growth coupled with 24.8% OPM.
PBT after EO (783.0) 2126.9 PL But only the additional fiancial burden and the forex loss of Rs 1715mn (against
Provision for tax (18.2) 532.8 LP a profit of Rs 790mn in corresponding period) have resulted in a net loss of Rs
PAT (764.8) 1594.1 PL
765mn. But the likely reversal of translation losses in the shortly expected Q4FY09
PAT M% (7.7) 18.5
result would boost the FY09E earnings.
Source: Company
Going ahead, with the immediate earning impact of Tazo+Pip launch and
subsequent triggering of pipeline opportunities, we estimate revenue would
grow at a CAGR of over 20% during FY09-11 and margins to remain firm backed
Stock Performance (Rel to sensex) by its cost reducing efforts and new launches. With the capex phase almost
over, Orchid management has now committed to reduce its debt/Equity levels
300 18000
from current 2.7x to about 1x.
BSE 16000
250
14000
After factoring the AS-11, our back of the calculation shows that Orchid would
200 12000
report a profit of Rs 507mn resulting a EPS of Rs 5.6 during FY09. But as we
10000
150 expect the adjusted forex loss will be capitalized (resulting a higher depreciation),
8000
the EPS for FY10 and FY11 stands at Rs 14.3 and Rs 22.3, respectively.
100 6000

4000
50
2000
Valuation
0
Orchid 0
Orchid is currently trading at an attractive valuation of 5x it FY11 EPS its FY11 EV/
Jun-08 Jul-08 Aug-08 Oct-08 Dec-08 Jan-09 Mar-09 Apr-09 Jun-09 EBITDA. Further looking at the robust earning opportunities in the pipeline and
debt reduction comitment, we recommend a BUY rating on Orchid with a target
Source: Capitaline price of Rs 176 (8x FY11E).
Contd..
 12th June 2009

Consolidated Financials
Profit & loss statement (Rs mn) Balance sheet (Rs mn)
YY/E March FY08 FY09E FY10E FY11E YY/E March FY08 FY09E FY10E FY11E
Net Sales 13,009.6 13,215.5 15,786.5 19,097.7 Equity Cap 658.5 708.8 708.8 708.8
% Growth 35.0 1.6 19.5 21.0 Reserves 5991.3 7087.7 7974.1 9591.8
EBIDTA 3,399.4 3,277.5 4,207.1 5,194.6 Networth 6649.8 7796.5 8682.9 10300.6
% Growth 27.5 (3.6) 28.4 23.5 Secured loans 9795.6 9045.6 8295.6 8295.6
Other Income 0.4 5.0 6.3 7.6 Unsecured loans 9909.8 11851.9 10964.4 9464.4
Interest 820.0 1,395.0 1,199.0 1,034.0 Total loans 19705.4 20897.5 19260.0 17760.0
Depreciation 1,006.8 1,342.6 1,436.6 1,537.2 Deffered Tax Liab 1149.1 1149.1 1149.1 1149.1
PBT 1,573.0 544.8 1,577.8 2,631.0 Total Liability 27504.3 29843.0 29091.9 29209.7
% Growth 90.4 (65.4) 189.6 66.8 Net Block 21600.7 21529.9 20571.0 19424.8
Forex (gain)/Loss (712.7) 2,100.1 - - Investments 8.1 8.1 8.1 9.1
PBT after EO 2,285.7 (1,555.3) 1,577.8 2,631.0 Inventory 6491.5 6589.7 7785.1 8371.6
Tax 532.3 38.1 173.6 394.7 Debtors 5379.4 5974.1 7352.6 8371.6
ReportedPAT 1,753.4 (1,593.5) 1,404.2 2,236.4 Cash balance 310.4 984.8 255.2 712.2
% Growth 123.2 (190.9) (188.1) 59.3 Other CA 1.3 1.3 1.3 1.3
Adj PAT # 1,206.7 506.7 1301.1 2032.4 Loans & Advances 1050.8 1321.6 1262.9 1527.8
% Growth 123.2 (190.9) (188.1) 59.3 Current Liabilities 6554.6 6155.2 7568.9 9208.7
Dividend (%) 44.6 45.0 50.0 50.0 Provisions 783.4 411.3 575.5 0.0
Reported EPS# 13.2 5.6 14.3 22.3 NCA 5895.4 8305.0 8512.8 9775.8
BVPS (Rs) 101.0 110.0 124.0 149.7 Total Assets 27504.3 29843.0 29091.9 29209.7

# After factoring AS-11 benefits

Ratio Analysis Cash Flow Statement (Rs mn)

YY/E March FY08 FY09E FY10E FY11E Y/E March FY08 FY09E FY10E FY11E
OPM % 26.1 24.8 26.7 27.2 PAT 1753.4 506.7 1301.1 2032.4
NPM % 13.5 (12.1) 8.2 10.6
Depreciation 1006.8 1342.6 1552.6 1777.2
ROE % 26.4 (20.4) 15.0 19.7
Change in WC (1096.9) (1735.1) (937.5) (805.9)
ROCE % 8.7 6.5 9.1 11.7
Operating CF 1663.2 114.2 1916.1 3003.7
Int. Cover (x) 4.1 2.3 3.5 5.0
Capex (6018.2) (1271.8) (593.6) (631.0)
D/E (x) 3.0 2.7 2.2 1.7
Asset Turnover (x) 0.5 0.4 0.5 0.7 Misc Exp 294.8 0.0 0.0 0.0

Debtors Days 150.9 165.0 170.0 160.0 Investing CF (5723.5) (1271.8) (593.6) (631.0)
Inventory Days 182.1 182.0 180.0 160.0 Equity 314.9 1013.2 0.0 0.0
Valuation ratios Dividends (343.6) (373.2) (414.6) (414.6)
P/CF per share (x) 4.4 (48.8) 4.3 3.2
Debt 3217.4 1192.1 (1637.5) (1500.0)
EV/Cash Profit (x) 12.7 15.9 10.0 7.0
Investments (7.3) 0.0 0.0 (1.0)
EV/EBIDTA (x) 8.3 9.0 6.8 5.1
Financing CF 3181.4 1832.1 (2052.1) (1915.6)
EV/Sales (x) 2.2 2.2 1.8 1.4
Mkt Cap/Sales(x) 0.7 0.7 0.6 0.5 Net Change (878.9) 674.4 (729.7) 457.0

CEPS (Rs) 30.2 (2.7) 31.3 41.7 Opening Cash 1189.2 310.4 984.8 255.2

P/ BV (x) 1.3 1.2 1.1 0.9 Closing Cash 310.4 984.8 255.2 712.2
Source: Reliance Money Research

2
 12th June 2009

Reliance Money Stock Rating

Rating Stock Performance
BUY Appreciate more than 15% in next 12 months
HOLD Appreciate upto 15% in next 12 months
REDUCE Depreciate upto 10% in next 12 months
SELL Depreciate More than 10% in next 12 months

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