Recommendation: Buy
Price target: Rs 355
Current market price: Rs 254
Key points
- Orchid Chemicals and Pharmaceuticals, historically a manufacturer of bulk drugs, has now entered the high-revenue, high-margin business of finished dosages in the USA. It has tied up with US counterparts for selling 16 anti-biotic formulations, representing a cumulative market size of US$3.2 billion in the USA, from 2006 onwards. This transition from a bulk drug manufacturer to an integrated manufacturer of formulations has resulted in higher valuations.
- Orchid has made marketing alliances with US companies for the sale of 20 lifestyle drugs representing a market size of US$20 billion. By signing deals with companies such as Apotex, Par and Stada, Orchid is assured of a significant market share in the highly competitive US lifestyle market. Thus the lifestyle segment in the regulated markets provides a huge opportunity for the company from FY2008 onwards.
- This year, Orchid has repaid Rs 265 crore of its high-cost debt. Going ahead, we thus expect interest savings of close to Rs 19 crore, which would add to the bottom line directly in FY2007. As a result we expect the net profit margin (NPM) of Orchid to increase from 4.6%in FY2005 to 13.9% in FY2007.
- Expect the profit after tax (PAT) to increase 4.5 times from Rs 31 crore in FY2005 to Rs 138 crore in FY2007, at a compounded annual growth rate (CAGR) of over 110%. These figures indicate the company's huge potential, which should materialise over the coming years.
- At the current market price of Rs 254, Orchid is trading at 7.5x its FY2007E cash earnings per share (EPS); that is a deep discount to its peers like Lupin and Torrent Pharma. Hence I assign it a price/cash earnings (PE) multiple of Rs 10.5 for FY2007 and initiate a Buy recommendation with an 18-month price target of Rs 355.
