Friday, April 18, 2014

Orchid Chemicals and Pharmaceuticals Ltd: Buy
CMP: Rs.54.65
Introduction: Established in 1992 as an export-oriented unit (EOU), Orchid Chemicals & Pharmaceuticals Ltd. (Orchid) is a vertically integrated company spanning the entire pharmaceutical value chain from discovery to delivery with established credentials in research, manufacturing and marketing. It ranks among the top 15 pharmaceutical companies in India and enjoy a multi-therapeutic presence across segments like anti-infectives, anti-inflammatory, central nervous system (CNS), cardio vascular segment (CVS), nutraceuticals and other oral and sterile products. Its pharmaceutical solutions include active pharmaceutical ingredients (API), finished dosage forms, new drug discovery (NDD), novel drug delivery systems (NDDS) and contract research and manufacturing services (CRAMS). It is globally present across 70+ countries through alliances, joint ventures and partnerships with globally reputed majors.

Shareholding Pattern: The promoters  hold 32.28% while the general public holds 63.14% in the company. Among the general public, the FIIs hold 3.26% while the DIIs hold 4.57%. The corporate bodies hold 22.85% of the shares of the company. Also, in the public category, the Serum Institute of India Ltd along with the PACs holds 14.84% stake in the company. Serum Institute of India is the fifth biggest vaccine maker by volume; the top four being GlaxoSmithKline, Sanofi-Aventis, Merck and Novartis. Half the children in the world are immunized by vaccines made by Serum Institute of India Ltd, which is the world's biggest maker of measles and DTP vaccines. Serum produces a billion doses a year selling in 140 countries. It is one of the world's lowest cost producers of vaccines and had sales of $250 million and net profits of $107 million.

Financials: The total income of the company in Q2FY14 came out to be Rs.371.60 Cr as against Rs.313.53 Cr in the same period previous year. The PBDT of the company in Q2FY14 came out to be Rs.3.51 Cr as against a loss of Rs.52.93 Cr in the same period previous year. The CEPS for Q2FY14 came out to be Re.0.50 (gain) as against (-) Rs.4.73 (loss) in Q2FY13. This shows great improvement in the fundamentals of the company. Not only that, the OPM has improved to 26.66% in Q4FY14 as against 5.66% in the same period previous year. Also, a substantial improvement in NPM can also be seen in Q2FY14 as against Q2FY13. 

(i)  The Book value of the shares of the company is Rs.69.29 against the CMP of Rs.54.65. The P/BV of Orchid Chemicals and Pharmaceuticals Ltd is 0.79, while let's check this value, in case of some of its peers:
a) Dr.Reddy's Laboratories Ltd--5.59
b) Sharon Bio Medicine Ltd--2.49
c) TTK Healthcare Ltd--4.07
d) Aarti Drugs Ltd--1.88
e) Syncom Formulations Ltd--3.89
Thus we see that the shares are undervalued in terms of even Book Value as compared to many of its established competitors. Moreover, the market cap of the company is only Rs.385.02 crore as against the 9MFY14 sales of Rs.1008.85 Cr and FY13 sales of Rs.1906.73 Cr. 
(ii) The company got its CDR scheme approved recently and now the Hospira deal can go through, which is a big positive for the company. 
(iii) The company’s addressable market size for the products under development in non-antibiotics segments was around $16 billion and the growth in the current non-antibiotics formulations business would come from timely filing and launches of products in the next 2-3 years. This business with its new launches is expected to attain critical mass by FY 2018-19. 
(iv) The company is expecting to monetise its research and development (R&D). Its new chemical entities research in therapeutic areas such as diabetes, obesity, inflammation, pain management and oncology will result in out-licensing opportunities in the years to come.
(v) It is also working towards expanding customer base in new geographies including establishment a strong footprint in the EU region. It would also look at strengthening presence in emerging markets, including Latin America and Asia Pacific.
(vi) The company also see strength in alliances for its active pharmaceuticals ingredients (API) and formulations business. 
(vii) Orchid was admitted for the CDR process in August 2013. The scheme includes sale of Orchid Pharma’s pencillin and penems API business together with its manufacturing facilities at Aurangabad, Maharashtra, and associated R&D facility at Sholinganallur, Chennai, for a cash consideration of about Rs.1,348 crore. It also includes repayment of a portion (Rs.681 crore) of the total debt to lenders out of the sale proceeds and restructuring of the balance debt of Rs.2,866 crore. Around Rs.430 crore from the sale proceeds would be used for meeting the working capital requirements.
The restructured debt together with funded loans would have to be repaid over a period of eight years starting from April 2015, subject to regulatory approvals. This gives much needed breathing space for the company. 
(viii) The company expects the working capital to strength on the back of a Rs.1,500-crore topline it anticipates by utilising more of its existing capacity. The Alathur facility alone has a capacity of $200 million topline.

Conclusion: Considering all the points mentioned above it has been found that the scrip of Orchid Chemicals and Pharmaceuticals Ltd is ready for re-rating in the Indian bourses. The investors are suggested to buy the scrip at the CMP of Rs.54.65 and hold it for a short term target of Rs.71-72. Please keep a SL of Rs.47. 
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