Value Buy - Orchid Chemicals

Orchid Chemicals & Pharmaceuticals, is into manufacture of API and Formulations with 2 API manufacturing units, one each at Chennai and Aurangabad, 3 Dosage Formulations units at Chennai and 2 R&D centres at Chennai. The company also has a 50 : 50 JV in China for manufacturing Sterile Cephalosporin.

· The company has been in news due to its steep share price fall, due to liquidation by the promoters and their financiers. This resulted in the share price falling to a low of Rs.107 against its 52 week high of Rs.328.

· The financial performance of the company has been quite robust for FY 07. On a standalone basis, its total income was at Rs.936 crores with EBITDA of Rs.291 crores, resulting into a margin of 31-10%. PBT was placed at Rs.111 crores, while PAT at Rs.96.63 crores, resulting into an EPS of Rs.14.70, on equity of Rs.65.82 crores.

· On consolidated basis, for FY 07, total income was at Rs.985 crores with PAT of Rs.78.60 crores resulting in an EPS of Rs.11.95.

· For 9 months ending 31-12-07 the total income of the company was at Rs.919 crores with EBITDA of Rs.344 crores, resulting in a margin of 37.44%. This shows a robust 6% plus growth over FY 07. PBT was at Rs.222 crores with PAT at Rs.169 crores, giving an EPS of Rs.25.70 for the period.

· On consolidated basis, 9 months ending 31-12-07, PAT was at Rs.159 crores, giving an EPS of Rs.24.15 for the period.

· 9 months ending 31-12-07, had an exceptional gain of Rs.79.04 crores, being gain on outstanding FCCB. A tax provision of Rs.30.75 crores made on this gain, thus having a net effect of Rs.48.29. crores.

· The company issued FCCB of US $ 175 million in February 07 for a tenure of 5 years with an option to convert them at Rs.348.335 per share. Issue expenses and premium to be paid in the event FCCB are not converted of Rs.363.71 crores, were adjusted against general reserves of the company in FY 07. Apart from this, the company has a debt of Rs.700 crores having an annual interest burden of Rs.75 crores.

· FY 08, may have a topline of Rs.1,200 crores with PAT of Rs.160 crores, from core business which results in an EPS of Rs.24 plus.

· For FY 09, the topline of the company is likely to be over Rs.1,500 crores, with PAT of Rs.200 crores, giving an EPS of Rs.30 plus.

· The recent liquidation, by the lenders to the promoters against their stock, has brought down the share price to very attractive level of Rs.142 which discounts FY 08 earning by about 6 times and by less than 5 times for FY 09 earnings.

· China JV would also start contributing to the consolidated results of the company. Fresh US FDA approvals for various drugs would also help the company in marketing its products in regulated market, which is very lucrative market and presently contributes to company’s topline by 50%.

· Recent fall is a one time affair, which is not due to any adverse changes in the basic fundamentals or working of the company. So, this should be used as an opportunity to buy the stock.

· Share at Rs.142 qualifies as an excellent bet which has potential to rise to Rs.200 levels in the next 6 – 8 months with virtually no downside risk. Go for it, this is a safe prescription at Rs.142.