Recommendation: Buy
CMP = Rs 244 (as of Monday)
Price target: Rs 375
Key points
- Orchid's revenues are likely to get a big boost in FY2008, with at least three major new products—Tazobactum + Piperacillin (market size of $480 million), Cefdinir (market size of over $600 million) and Cefepime (market size of $190 million)—slated for launch.
- I expect these products to collectively generate $35.8 million and $47.5 million in revenues in FY2008 and FY2009 respectively.
- From manufacture of sterile Cephalosporins, Orchid is now venturing into the non-antibiotic space. It has already filed ten abbreviated new drug applications (ANDAs) with the US Food and Drug Administration (US FDA) and received one product approval for Terbinafine tablets.
- Orchid's much awaited entry into Europe seems at an arm's length now. With all the prerequisites in place, Orchid seems all set to launch Tazo-Pip formulation in Europe. Tazo-Pip will be a big opportunity for Orchid in Europe as the company will be one amongst the three manufacturers of the product in the market. We expect the European business to generate $14.0 million in FY2008 and $26.2 million in FY2009.
- Over the years, Orchid has transformed itself from a company manufacturing bulk drugs for the unregulated markets to one that exports formulations to the regulated markets of the USA and Europe. Led by an improved product and geographical mix, we expect Orchid's operating profit margin (OPM) to expand by 300 basis points from 31.7% in FY2007 to 34.7% over FY2009E.
- Being a 100% export oriented unit (EOU), Orchid was so far exempt from paying any taxes. However, with the newly introduced provision in the Union Budget for FY2007 whereby companies operating as 100% EOUs are liable to pay the minimum alternative tax (MAT) of 11.32%, Orchid too has come under the tax net.
- Incorporating the impact of the delay in the launches of Ceftiofur, Tazo-Pip and Cefdinir in the USA as well as that of Orchid coming under the purview of MAT, of reduced interest burden on account of repayment of debt and of the equity dilution, we are revising our FY2008 estimates.
- At the current market price of Rs 244, Orchid is quoting at 10.4x its estimated FY2009 earnings.
- In view of the bright prospects for the company, I retain the positive stance on the stock and maintain Buy call with a revised price target of Rs 375, at which Orchid will discount its FY2009 fully diluted earnings by 16x.
