Please refer to important disclosures at the end of this report 1 Y/E March (Rs cr) 1QFY2011 4QFY2010 %chg (qoq) 1QFY2010 %chg (yoy) Net Sales 304 286 6.3 306 (0.7) Other Operating Income 27 10 186.2 3 811.0 Operating Profit 57 (407) - 62 - Net Profit 22 382 (94.3) (30) - Source: Company, Angel Research Orchid Chemicals (Orchid) reported 1QFY2011 results, which were above our expectations driven by other operating income and higher off-take under the Hospira contract. For FY2011, the company has guided for top-line growth of 23% to Rs1,600cr with EBITDA margins (including other operating income) of 22%. However, concerns on the balance sheet front persist (high receivable days and low fixed-asset turnover ratio). We maintain Neutral on the stock. Results above expectations: For 1QFY2011 Orchid reported flat net sales on a yoy basis to Rs303.6cr (Rs305.8cr), which was however higher than our expectation of Rs275.0 primarily due to the higher contribution from the Hospira contract. The company reported OPM of 18.6% (excluding other operating income), which was in line with expectation. Net profit stood at Rs21.7cr (loss of Rs29.7cr) primarily driven by other operating income. The company reported other operating income of Rs27.4cr (Rs3.0cr) on account of milestone payments under supply agreements (primarily Alvogen) and settlement income from Memantine. Outlook and Valuation: For FY2011E we expect the company to post net sales of Rs1,302cr, with EBITDA margins of 21.0% (including other operating income). Further, post the Hospira deal, high receivable days and low fixed-asset turnover ratio remains a cause of concern. The stock is currently trading at 14.3x FY2011E and 11.1x FY2012E earnings. We maintain Neutral on the stock. Key Financials Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E Net Sales 1,260 1,299 1,302 1,654 % chg 0.5 3.1 0.3 27.0 Recurring Net Profit (33) (676) 94 120 % chg - - - 28.6 EBITDA Margin (%) 11.9 (15.5) 17.7 18.5 Recurring EPS (Rs) - - 13.3 17.1 P/E (x) - - 14.3 11.1 P/BV (x) 2.4 1.4 1.4 1.5 RoE (%) - - 9.6 13.0 RoCE (%) 0.5 - 4.3 7.0 EV/Sales (x) 3.1 2.0 2.0 1.7 EV/EBITDA (x) 26.1 (13.1) 11.2 9.2 Source: Company, Angel Research NEUTRAL CMP Rs191 Target Price - Investment Period - Stock Info Sector Bloomberg Code OCP@IN Shareholding Pattern (%) Promoters 26.0 MF / Banks / Indian Fls 45.7 FII / NRIs / OCBs 11.7 Indian Public / Others 16.7 Abs. (%) 3m 1yr 3yr Sensex 2.9 19.4 14.3 Orchid 21.3 114.6 (18.4) Face Value (Rs) BSE Sensex Nifty Reuters Code Pharmaceutical Avg. Daily Volume Market Cap (Rs cr) Beta 52 Week High / Low 10 17,977 5,399 ORCD.BO 1,343 1.3 239/87 649042 Sarabjit Kour Nangra Tel: 022 – 4040 3800 Ext: 343 [email protected]Sushant Dalmia Tel: 022 – 4040 3800 Ext: 320 [email protected]Orchid Chemicals Performance Highlights 1QFY2011 Result Update | Pharmaceutical July 21, 2010
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Please refer to important disclosures at the end of this report 1
Y/E March (Rs cr) 1QFY2011 4QFY2010 %chg (qoq)
1QFY2010 %chg (yoy)
Net Sales 304 286 6.3 306 (0.7)
Other Operating Income 27 10 186.2 3 811.0
Operating Profit 57 (407) - 62 -
Net Profit 22 382 (94.3) (30) -
Source: Company, Angel Research
Orchid Chemicals (Orchid) reported 1QFY2011 results, which were above our expectations driven by other operating income and higher off-take under the Hospira contract. For FY2011, the company has guided for top-line growth of 23% to Rs1,600cr with EBITDA margins (including other operating income) of 22%. However, concerns on the balance sheet front persist (high receivable days and low fixed-asset turnover ratio). We maintain Neutral on the stock.
Results above expectations: For 1QFY2011 Orchid reported flat net sales on a yoy basis to Rs303.6cr (Rs305.8cr), which was however higher than our expectation of Rs275.0 primarily due to the higher contribution from the Hospira contract. The company reported OPM of 18.6% (excluding other operating income), which was in line with expectation. Net profit stood at Rs21.7cr (loss of Rs29.7cr) primarily driven by other operating income. The company reported other operating income of Rs27.4cr (Rs3.0cr) on account of milestone payments under supply agreements (primarily Alvogen) and settlement income from Memantine.
Outlook and Valuation: For FY2011E we expect the company to post net sales of Rs1,302cr, with EBITDA margins of 21.0% (including other operating income). Further, post the Hospira deal, high receivable days and low fixed-asset turnover ratio remains a cause of concern. The stock is currently trading at 14.3x FY2011E and 11.1x FY2012E earnings. We maintain Neutral on the stock.
Exhibit 2: 1QFY2011- Actual v/s Angel estimates Rs cr Estimate Actual Variation (%)
Net Sales 275 304 10.4
Other Operating Income 9 27 215.2
Operating Profit 48 57 16.7
Tax 1 2 211.3
Net Profit 10 22 111.1
Source: Company, Angel Research
Reports flat revenues, but above expectation: Orchid Chemical reported net sales of Rs303.6cr (Rs305.8cr) for 1QFY2011, which was flat on a yoy basis, but higher than our expectation of Rs275.0 primarily on account of the higher contribution from the Hospira contract post the Meropenem approval in the US. The approval of Meropenem is positive as it is likely to be a limited competition opportunity for Hospira for at least a couple of quarters. The company indicated that the Hospira contract contributed about 22% of net sales. Orchid expects the Hospira contract to contribute about Rs350cr in FY2011.
Orchid Chemicals | 1QFY2011 Result Update
July 21, 2010 3
Exhibit 3: Sales trend
Source: Company, Angel Research
OPM in line with expectation: Orchid reported OPM of 18.6% (excluding other operating income) mainly on back of lower other expenses which de-grew by 36.9% to Rs66.9cr (Rs105.9cr). However, gross margins for the quarter came in at 50.6% (64.4%). Further, employee expense during the quarter increased by 4.7% to Rs30.3cr (Rs29.0cr) in spite of transfer of 10% of the workforce to Hospira in 4QFY2010; management indicated that the increase was primarily on account of the increments effected during the quarter.
Net profit driven by other operating income: Orchid reported net profit of Rs21.7cr (loss of Rs29.7cr) primarily driven by other operating income. The company reported other operating income of Rs27.4cr (Rs3.0cr) on account of milestone payments received under the supply agreements (primarily Alvogen) and settlement income from Memantine. Interest cost for the quarter de-grew by 56.0% to Rs22.7cr (Rs51.7cr) following reduction in the debt levels by Rs1,400cr.
Exhibit 4: Interest cost declines
Source: Company, Angel Research
306 305309
286
304
250
260
270
280
290
300
310
320
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Sales
Rs cr
5257 54
79
23
0
20
40
60
80
100
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Interest cost
Rs cr
Orchid Chemicals | 1QFY2011 Result Update
July 21, 2010 4
Concall takeaways
Orchid has guided for top-line of Rs1,600cr, with EBITDA margins (including
other operating income) of 22% for FY2011.This could possibly translate into
net profit of Rs115-120cr for the year. On the capex front, the company
expects to incur Rs100-150cr during FY2011.
On the ANDA front, the company’s filings stand at 36 (13 in Cephalosporins
and 23 in NPNC space), which includes 8 Para IV FTFs. Orchid has so far
received 20 ANDA approvals. The company intends to file 18 ANDA during
FY2011.
Orchid expects its debtor days to reduce from 179 in FY2010 to around 120
by FY2011.
The company plans to capitalise 60-70% of its CWIP and advance for capital
aggregating to Rs469cr (21% of GFA) by FY2011.
Annual Report takeaways
Balance sheet: Signs of improvement
Post divestment of the injectable business to Hospira, Orchid has been able to restructure its balance sheet to some extent. While debt and inventory levels have fallen considerably, receivables and fixed-asset turnover ratio remains a cause of concern.
Orchid repaid debt to the tune of Rs1,400cr in FY2010, thereby reducing its
net debt/equity ratio to 1.4x from 4.7x in FY2009.
In FY2010, inventory levels reduced by Rs346cr to Rs423cr primarily on
account of transfer of the injectable business to Hospira and write-offs.
Receivable days continue to be much above the industry average at 179
indicating that quality issues may persist (79% outstanding for more than 6
months) and is vulnerable to currency fluctuations (73% FC denominated). The
company made provisions of Rs80cr by way of rebates and discounts in
FY2010.
Fixed-asset turnover ratio continues to be subdued and much below the
industry average (1.5-2x for API players). Orchid has high levels of
CWIP/advance items for the last four years, which continues to hurt return
ratios. The company capitalised interest cost to the tune of Rs46cr during
Exhibit 8: CWIP and advance for capital items trend
Source: Company, Angel Research; Note: FY2010 numbers exclude the
injectable business
383
538
673 647
0
30
60
90
120
150
180
210
0
200
400
600
800
FY2007 FY2008 FY2009 FY2010
Receivables Receivables days
Rs c
rRs
cr
Da
ys
612
649768
423
0
30
60
90
120
150
180
210
240
0
200
400
600
800
1000
FY2007 FY2008 FY2009 FY2010
Inventory Inventory days
Rs c
rRs
cr
Da
ys
1530
1939
2563
1309
0.0
1.0
2.0
3.0
4.0
5.0
0
500
1000
1500
2000
2500
3000
FY2007 FY2008 FY2009 FY2010
Net Debt Net Debt/Equity
Rs c
rRs
cr
x
553620
547469
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
100
200
300
400
500
600
700
FY2007 FY2008 FY2009 FY2010
CWIP and Advance for capital items Fixed Asset/TO
xRs c
r
Orchid Chemicals | 1QFY2011 Result Update
July 21, 2010 6
Recommendation Rationale
Sales mix to change significantly: With the sell-off of the high-margin injectable business to Hospira, the company's future sales mix is expected to change dramatically from 50:50 API:formulation in FY2009 to 72:28 in FY2012E. Orchid expects the API supply contract to Hospira for the generic injectables to contribute US $70-80mn to its top-line in FY2011. However, we have assumed contribution of US $64mn in FY2011E from the contract. Orchid also expects to enter into an API supply contract for Penems with one more player in addition to Hospira. Further, with the high-margin injectable business now sold off, the company is likely to see compression in EBITDA margins (excluding other operating income) from 23.3% in FY2008 to 18.5% in FY2012E.
Balance sheet de-leveraged, but return ratios suppressed: Orchid utilised some of the proceeds received from Hospira to repay Rs1,400cr debt in 4QFY2010 of the total debt of Rs2,616cr. As a result, the company's net debt/equity has reduced from 4.7x FY2009 to almost 1.4x in FY2010. Pertinently, Orchid has been reeling under debt pressure with interest cost rising to Rs242cr and losses on the operating front in FY2010. Thus, with this repayment, the company's interest cost is expected to decline by Rs160cr. However, Orchid's RoCE would continue to remain suppressed at sub-7% levels on the back of lower sweating of assets and lower margins.
Acquisitions and supply contract may provide growth ahead: Orchid recently entered into a long-term supply contract with Alvogen, wherein Alvogen will market eight high-potential oral products from Orchid in the US market. In the long term, Orchid expects this deal to contribute US $80-100mn to top-line post commencement of the shipment of all the products. Orchid has also entered into an agreement to acquire the US-based generic marketing and sales service company, Karalex Pharma. With this acquisition, Orchid will get front-end presence in the US and reach its customers directly, which would increase overall margins of its US generic business. We expect the deal to contribute US $10mn in FY2011E and US $15mn in FY2012E to Orchid's top-line, with EBITDA margins to be in line with current levels of 17-18%.
Valuation: For FY2011E, the company has guided for top-line of Rs1,600cr, implying a growth of 23% yoy. Orchid expects to clock EBITDA margin of 22% (including other operating income). We expect the company to post net sales of Rs1,302cr, with EBITDA margin of 21.0% (including other operating income) in FY2011E. Even post the Hospira deal, high receivable days and low fixed-asset turnover ratio remains a cause of concern. The stock is currently trading at 14.3x FY2011E and 11.1x FY2012E earnings. We maintain Neutral on the stock.
Cash Flow from Financing 595 279 518 (1,808) (277) (76)
Inc./(Dec.) in Cash 110 (88) 21 283 (161) (63)
Opening Cash balances 9 119 31 53 335 174
Closing Cash balances 119 31 53 335 174 111
Orchid Chemicals | 1QFY2011 Result Update
July 21, 2010 11
Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 15.9 7.1 - - 14.3 11.1
P/CEPS 7.6 4.5 13.3 - 6.4 5.5
P/BV 2.6 1.9 2.4 1.4 1.4 1.5
Dividend yield (%) 2.4 2.3 0.7 6.6 0.9 0.9
EV/Sales 3.0 2.5 3.1 2.0 2.0 1.7
EV/EBITDA 12.1 10.9 26.1 (13.1) 11.2 9.2
EV / Total Assets 1.2 1.2 1.2 0.9 1.0 1.1
Per Share Data (Rs)
EPS (Basic) 11.9 26.6 - 48.2 13.3 17.1
EPS (fully diluted) 11.9 26.6 - - 13.3 17.1
Cash EPS 24.9 41.9 14.3 - 29.6 34.3
DPS 4.5 4.5 1.3 12.6 1.7 1.7
Book Value 73.7 101.0 78.1 135.6 139.8 123.4
Dupont Analysis
EBIT margin 15.6 15.3 1.2 - 8.9 11.2
Tax retention ratio 84.9 76.7 - - 82.3 82.0
Asset turnover (x) 0.5 0.5 0.4 - 0.6 0.7
ROIC (Post-tax) 6.5 6.3 - - 4.0 6.3
Cost of Debt (Post Tax) 6.3 3.5 - - 4.3 6.3
Leverage (x) 2.2 3.0 3.8 - 1.3 1.5
Operating ROE 7.0 14.9 - - 3.7 6.3
Returns (%)
ROCE (Pre-tax) 7.1 7.7 0.5 - 4.3 7.0
Angel ROIC (Pre-tax) 9.8 11.1 0.7 - 6.0 9.1
ROE 12.5 30.5 - - 9.6 13.0
Turnover ratios (x)
Asset Turnover (Gross Block)
0.7 0.7 0.6 0.6 0.6 0.7
Inventory / Sales (days) 202 177 200 162 116 105
Receivables (days) 139 129 171 179 174 130
Payables (days) 111 95 109 83 97 85 Working capital cycle (ex-cash) (days)
331 142 176 147 103 96
Solvency ratios (x)
Net debt to equity 3.2 2.9 4.7 1.4 1.3 1.7
Net debt to EBITDA 6.7 6.6 17.1 (6.5) 5.4 4.8 Interest Coverage (EBIT / Interest)
1.5 2.3 0.1 (1.5) 1.5 1.6
Orchid Chemicals | 1QFY2011 Result Update
July 21, 2010 12
Disclosure of Interest Statement Orchid Chemical 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)
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