Booster Dose
 

Orchid Chemicals and Pharma looks to be a attractive bet as the company forges growth across its various business segments midcap, growth

Small Cap Stock Idea ? Orchid Chemicals & Pharmaceuticals

(Value + Growth)

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 Rs 1,400-crore Orchid Chemicals is among the top five generic antibiotics manufacturers in the world. It is an export-oriented undertaking earning 90% of its revenues from outside India. 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 Rs 1,900 crore. It was a prudent decision on part of the company as the sale proceeds were used to reduce the debt on books and redeem its foreign currency convertible bonds (FCCBs) to the tune of Rs 110 crore that were due in November 2010.

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 through an all-cash deal. Karalex has been growing at 20% annually giving Orchid inroads into the branded generics space in the US.

The company expects strong growth over the next three years in non-penicillin, non-cephalosporin (NPNC) segment where it possesses strong product portfolio spanning diverse therapeutic areas. For many of these products, Orchid possesses marketing alliances in the US and Europe with prominent players such as Actavis, North Star and Alvogen. The company also expects to capitalise on its Para IV opportunities. Its leading eight Para IV first-to-file filings provide a revenue potential of about $80 million.

Financials

For the nine months ended December 2010, the company registered a 20% growth in net sales. Its net profit stood at Rs 97 crore against a year-ago loss of Rs 58 crore. The debt repayment from the Hospira deal proceeds resulted in reduction of the interest cost. This helped improve the company's margins. The company is likely to surpass its guidance of 30% growth in revenue and net profit of Rs 140 crore for FY11.

The company now has Rs 100 crore cash in its books. For FY12, it expects its revenues to grow by 30% and more than proportionate rise in net profit. It would invest Rs 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 foreseeable future till the time other businesses achieve sizeable traction.

Valuations

At a market cap of Rs 1,867 crore, the company is valued at one-and-a-half times its last 12 months turnover of Rs 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.

One-year beta: 1.6
Institutional holding (as of Dec'10): 6.5%
Current dividend yield: 4.7
Current P/E: 3.8
Current m-cap: Rs 1867 crore
Current market price: Rs 265

 
Kiran Kabtta Somvanshi
 
kiran.somvanshi@timesgroup.com