Stock Review: Orchid Chemicals

 

Chennai-based drug manufacturer Orchid Chemicals posted strong performance for the quarter ended March 2011. However, its performance for the entire fiscal FY11 is not comparable with the previous fiscal year because of the sale of its injectable business to US-based Hospira in March 2010.

Despite selling around one-third of its business, Orchid generated 32% growth in its consolidated revenues for the fiscal ended FY11. The company has surpassed its annual sales growth guidance by 9%. It posted an operating profit of . 419 crore against an operating loss of . 156.5 crore in FY10.

Existing products like Tazobactum and approvals for new products in the European and other markets enabled the company to ramp up its sales during the year. The supply agreement with Hospira is contributing over one-fifth to the company's consolidated revenues.

The company has guided sales of $500 million (25% increase on sales of FY11) and 24% operating profit margin for the current fiscal. It should not be difficult to achieve, given the full-year sales of certain products that received approval in mid-FY11, new product approvals that are expected in the US over the next few months, launch of non-antibiotic products and full-year sales of the recently acquired front-end company in the US. Orchid has a healthy product pipeline of 42 filings in the US, of which eight are first-to-file para-IV applications.
While the company has achieved a major turn around operationally and has promising growth prospects, its balance sheet still needs improvement. The company has a net debt of . 1,600 crore that includes FCCBs of . 530 crore due in February 2012.

The company proposes to raise funds to the tune of . 1,000 crore towards redemption of FCCBs and debt reduction. It is likely to result in equity dilution of around 25%. Though the management is confident of the fund raising being EPS accretive, it remains to be seen what will be the net effect on the EPS at the end of the next year post the equity dilution.

The company's stock has fallen by nearly 9% in the last two trading sessions following the results. While the market's knee-jerk reaction has been negative, there is no reason for investors to exit the stock given the strength of the company's performance delivered in FY11 and promising growth factors.