Stock Review: Orchid Chemicals and Pharma

Orchid Chemicals and Pharma looks an attractive bet given the growth prospects across its various business segments

 

CHENNAI-BASED Orchid Chemicals and Pharmaceuticals is at an inflexion point of growth. After selling its lucrative injectable formulations business to Hospira last year, the company has built upon its remaining non-injectable business to grow over and above its pre-sale revenues. Investors can participate in the company's progress as it forges growth across its various business segments.

BUSINESS:

The 1,400-crore Orchid Chemicals is among the top five generic antibiotics manufacturers in the world. It earns 90% revenue from overseas markets. Since inception, Orchid has established a strong foothold in niche therapeutic segments that are relatively uncluttered due to the inherent technical complexity.

   In December 2009, the company sold its injectable business to US-based pharma major Hospira at 1,900 crore. It used the proceeds to to reduce the debt and redeem foreign currency convertible bonds (FCCBs) to the tune of 110 crore.
   As a part of the deal, Orchid also has a 10-year arrangement with Hospira for supplying active pharmaceutical ingredients (API) for the sold injectable products. It has emerged as the single-largest segment with 25% contribution to the topline.

   Orchid has also started supplying APIs to other companies. It is among the very few players in the world supplying certain group of anti-biotics like cephalosporins, penecillins etc to regulated markets in the US and Europe.

GROWTH OPPORTUNITIES:

After reducing its borrowings, Orchid Chemicals is now getting into formulations business by either buying businesses or in-licensing brands in therapies outside of antibiotics. It recently acquired Karalex Pharma, a US-based generic marketing and sales services company. Karalex has been growing at 20% annually. The company expects strong growth over the next three years in nonpenicillin, non-cephalosporin (NPNC) segment. For many of these products, Orchid possesses marketing alliances in the US and Europe with prominent players such as Actavis, North Star and Alvogen.

FINANCIALS:

For the nine months ended December 2010, the company registered a 20% growth in net sales. Its net profit stood at 97 crore against a year-ago loss of 58 crore. The debt repayment from the Hospira deal proceeds

helped to improve margins.Orchid is likely to surpass its guidance of 30% growth in revenue and net profit of 140 crore for FY11. It would invest 400 crore by FY12 in new therapeutic areas of ophthalmology and immuno-suppressants.

   Orchid's management expects the contribution of revenue from Hospira deal to remain in the region of 20-25% in the near term.

VALUATIONS:

At a market cap of 1,867 crore, the company is valued at one-and-a-half times its last 12 months turnover of 1,385 crore. Its stock is trading at 3.8 times its earnings. These are low valuations for a company that has potential to be a sector outperformer in the coming quarters. The promoter has been steadily increasing its stake in the company reinforcing management's confidence in the company's growth story.