Stock Idea - Orchid Chemicals & Pharmaceuticals

Recommendation: Buy

CMP = Rs 251 (at the time of this recommendation)

Price target: Rs 300

Key points:

• Orchid Chemicals' (Orchid) Q4FY2008 and FY2008 results are a mixed bag: Strong margin pressure along with higher than anticipated interest burden and forex translation losses dragged down the profitability of the company during Q4FY2008. 
• The US generic market continued to power Orchid's growth, with revenues growing by 55.9% to Rs 379.2 crore in Q4FY2008 and by 35.7% to Rs 1,238.9 crore in FY2008. The growth was driven by the consolidation of the market share in niche product opportunities like Cefepime injections, Cefdinir tablets, and Cefoxitin and Cefazolin injections.
• Orchid's operating profit margin (OPM) shrank by 730 basis points to 20.3% in Q4FY2008 and by 290 basis points to 27.8% in FY2008. The declining margin restricted the operating profit growth to 14.6% at Rs 77.1 crore in Q4FY2008 and to 23.2% at Rs 344.8 crore in FY2008.
• Orchid's debt level remains high at $220 million (excluding the foreign currency convertible bonds as reflected in the increase in the interest cost in Q4FY2008. Further, the capex cycle does not seem to be over yet, with the company planning capex of ~Rs 150 crore in FY2009 and of Rs 150-175 crore in FY2010.
• The management has stated its intention of reducing its debt level further in the coming years. Despite the strong growth drivers and a robust business model, I believe the above-mentioned concerns will remain as an overhang on the stock, until the company's financials clearly reflect the management's intentions.
• In view of these concerns, I maintain a cautious Buy recommendation on the stock with a price target of Rs 300.