Orchid Chemicals NEUTRAL. Performance Highlights. Target Price - 1QFY2011 Result Update Pharmaceutical. Investment Period -

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1 1QFY211 Result Update Pharmaceutical July 21, 21 Orchid Chemicals Performance Highlights Y/E March (Rs cr) 1QFY211 4QFY21 %chg (qoq) 1QFY21 %chg (yoy) Net Sales (.7) Other Operating Income Operating Profit 57 (47) Net Profit (94.3) (3) - Orchid Chemicals (Orchid) reported 1QFY211 results, which were above our expectations driven by other operating income and higher off-take under the Hospira contract. For FY211, the company has guided for top-line growth of 23% to Rs1,6cr 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 1QFY211 Orchid reported flat net sales on a yoy basis to Rs33.6cr (Rs35.8cr), which was however higher than our expectation of Rs275. 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.cr) on account of milestone payments under supply agreements (primarily Alvogen) and settlement income from Memantine. Outlook and Valuation: For FY211E we expect the company to post net sales of Rs1,32cr, with EBITDA margins of 21.% (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 FY211E and 11.1x FY212E earnings. We maintain Neutral on the stock. NEUTRAL CMP Rs191 Target Price - Investment Period - Stock Info Sector Pharmaceutical Market Cap (Rs cr) Beta 52 Week High / Low Avg. Daily Volume 1, / Face Value (Rs) BSE Sensex Nifty Reuters Code 1 17,977 5,399 ORCD.BO Bloomberg Code OCP@IN Shareholding Pattern (%) Promoters 26. MF / Banks / Indian Fls 45.7 FII / NRIs / OCBs 11.7 Indian Public / Others 16.7 Abs. (%) 3m 1yr 3yr Sensex Orchid (18.4) Key Financials Y/E March (Rs cr) FY29 FY21 FY211E FY212E Net Sales 1,26 1,299 1,32 1,654 % chg Recurring Net Profit (33) (676) % chg EBITDA Margin (%) 11.9 (15.5) Recurring EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) 26.1 (13.1) Sarabjit Kour Nangra Tel: Ext: 343 sarabjit@angeltrade.com Sushant Dalmia Tel: Ext: 32 sushant.dalmia@angeltrade.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 1QFY211 performance (standalone) Y/E March (Rs cr) 1QFY211 4QFY21 %chg (qoq) 1QFY21 %chg (yoy) FY21 FY29 %chg Net Sales (.7) 1,25 1, Other Income (2.2) Total Income PBIDT 57 (47) (217) Operating Margin (%) Interest (71.4) 52 (56.) Depreciation & Amortisation (11.7) 37 (13.6) PBT & Exceptional Items 29 (514) (15.6) (24) - (563) 4 - Exceptional Items (5) 89 (1.5) (4) (4) - Profit Before Tax (93.6) (28) (37) - Provision for Taxation 2 (5) Net Profit (94.3) (3) (52) - EPS (Rs) Exhibit 2: 1QFY211- Actual v/s Angel estimates Rs cr Estimate Actual Variation (%) Net Sales Other Operating Income Operating Profit Tax Net Profit Reports flat revenues, but above expectation: Orchid Chemical reported net sales of Rs33.6cr (Rs35.8cr) for 1QFY211, which was flat on a yoy basis, but higher than our expectation of Rs275. 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 Rs35cr in FY211. July 21, 21 2

3 Exhibit 3: Sales trend Rs cr QFY21 2QFY21 3QFY21 4QFY21 1QFY211 Sales 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 (Rs15.9cr). However, gross margins for the quarter came in at 5.6% (64.4%). Further, employee expense during the quarter increased by 4.7% to Rs3.3cr (Rs29.cr) in spite of transfer of 1% of the workforce to Hospira in 4QFY21; 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.cr) 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.% to Rs22.7cr (Rs51.7cr) following reduction in the debt levels by Rs1,4cr. Exhibit 4: Interest cost declines Rs cr QFY21 2QFY21 3QFY21 4QFY21 1QFY211 Interest cost July 21, 21 3

4 Concall takeaways Orchid has guided for top-line of Rs1,6cr, with EBITDA margins (including other operating income) of 22% for FY211.This could possibly translate into net profit of Rs115-12cr for the year. On the capex front, the company expects to incur Rs1-15cr during FY211. 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 2 ANDA approvals. The company intends to file 18 ANDA during FY211. Orchid expects its debtor days to reduce from 179 in FY21 to around 12 by FY211. The company plans to capitalise 6-7% of its CWIP and advance for capital aggregating to Rs469cr (21% of GFA) by FY211. 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 Rs1,4cr in FY21, thereby reducing its net debt/equity ratio to 1.4x from 4.7x in FY29. In FY21, 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 Rs8cr by way of rebates and discounts in FY21. 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 FY21. July 21, 21 4

5 Exhibit 5: Receivables trend Exhibit 6: Inventory trend Rs cr Days Rs cr Days FY27 FY28 FY29 FY21 FY27 FY28 FY29 FY21 Receivables Receivables days Inventory Inventory days ; Note: FY21 numbers exclude Rs 9cr receivable from Hospira Exhibit 7: Net debt trend Exhibit 8: CWIP and advance for capital items trend Rs cr FY27 FY28 FY29 FY x Rs cr FY27 FY28 FY29 FY x Net Debt Net Debt/Equity CWIP and Advance for capital items Fixed Asset/TO ; Note: FY21 numbers exclude the injectable business July 21, 21 5

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 5:5 API:formulation in FY29 to 72:28 in FY212E. Orchid expects the API supply contract to Hospira for the generic injectables to contribute US $7-8mn to its top-line in FY211. However, we have assumed contribution of US $64mn in FY211E 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 FY28 to 18.5% in FY212E. Balance sheet de-leveraged, but return ratios suppressed: Orchid utilised some of the proceeds received from Hospira to repay Rs1,4cr debt in 4QFY21 of the total debt of Rs2,616cr. As a result, the company's net debt/equity has reduced from 4.7x FY29 to almost 1.4x in FY21. Pertinently, Orchid has been reeling under debt pressure with interest cost rising to Rs242cr and losses on the operating front in FY21. Thus, with this repayment, the company's interest cost is expected to decline by Rs16cr. 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 $8-1mn 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 $1mn in FY211E and US $15mn in FY212E to Orchid's top-line, with EBITDA margins to be in line with current levels of 17-18%. Valuation: For FY211E, the company has guided for top-line of Rs1,6cr, 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 Rs1,32cr, with EBITDA margin of 21.% (including other operating income) in FY211E. 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 FY211E and 11.1x FY212E earnings. We maintain Neutral on the stock. July 21, 21 6

7 Exhibit 9: Key assumptions Estimates FY211E FY212E Domestic Sales Growth (%) Export Sales Growth (%) (7.7) 3.4 Growth in Employee Expenses (%) (14.5) 15.9 Operating Margins (excl operating income) (%) Capex (Rs cr) Exhibit 1: Change in estimates Rs cr FY211E FY212E Earlier Revised Var Earlier Revised Var Estimates Estimates (%) Estimates Estimates (%) Net Sales 1,22 1, ,652 1,654.1 EBITDA (excluding op income) Interest cost Tax PAT Capex (42.2) (22.9) Exhibit 11: One-year forward EV/Sales band 7, EV (Rs cr) 6, 5, 4, 3, 2, 1, Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 4x 3x 2x 1x July 21, 21 7

8 Exhibit 12: Recommendation Summary Company Reco. CMP Tgt. Price Upside FY212E FY1-12E FY212E PE (Rs) (Rs) % EV/Sales (x) EV/EBITDA (x) EPS CAGR (%) RoCE(%) RoE(%) (x) Alembic Buy Aventis* Sell 1,985 1,658 (16) Cadila Healthcare Accumulate Cipla Accumulate Dr Reddy's Neutral 1, Dishman Pharma Buy GSK Pharma* Sell 2,28 1,7 (16) Indoco Remedies Accumulate Ipca labs Neutral Lupin Accumulate 1,878 2, Orchid Chemicals Neutral Piramal Healthcare Neutral Ranbaxy* Neutral Sun Pharma Neutral 1, ; *December year end July 21, 21 8

9 Profit & Loss Statement (Consolidated) Y/E March (Rs cr) FY27 FY28 FY29 FY21 FY211E FY212E Net Sales 926 1,253 1,26 1,299 1,32 1,654 Other operating income Total operating income 959 1,298 1,293 1,342 1,357 1,719 % chg (.4) Total Expenditure ,11 1,5 1,72 1,348 Net Raw Materials Other Mfg costs Personnel Other EBITDA (22) % chg (48.8) (234.7) (214.3) 32.8 (% of Net Sales) (15.5) Depreciation& Amortisation EBIT (356) % chg (91.8) (2,373.1) (132.4) 59.5 (% of Net Sales) (27.4) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT (18) (546) % chg (58.8) , Extraordinary Expense/(Inc.) (1,15.3) - - PBT (reported) (34) Tax (% of PBT) PAT (reported) (49) PAT after MI (reported) (49) ADJ. PAT (33) (676) % chg (% of Net Sales) Basic EPS (Rs) Adj Fully Diluted EPS (Rs) % chg July 21, 21 9

10 Balance Sheet (Consolidated) Y/E March (Rs cr) FY27 FY28 FY29 FY21 FY211E FY212E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans 1,649 1,971 2,616 1,644 1,426 1,586 Deferred Tax Liability Total Liabilities 2,226 2,75 3,295 2,82 2,616 2,671 APPLICATION OF FUNDS Gross Block 1,468 2,3 2,61 2,25 2,43 2,564 Less: Acc. Depreciation Net Block 1,1 1,445 1,913 1,58 1,57 1,582 Capital Work-in-Progress Goodwill Investments Current Assets 1,232 1,323 1,595 1,7 1,344 1,515 Cash Loans & Advances Other 995 1,187 1,441 1,16 1, 1,213 Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 2,226 2,75 3,295 2,82 2,616 2,671 Cash Flow Statement (Consolidated) Y/E March (Rs cr) FY27 FY28 FY29 FY21 FY211E FY212E Profit before tax (34) Depreciation (Inc)/Dec in Working Capital (184) (118) (117) (156) Direct taxes paid (1) (32) (3) (66) (18) (15) Cash Flow from Operations (8) 179 (2) (Inc.)/Dec.in Fixed Assets (477) (545) (477) 1,413 (115) (84) (Inc.)/Dec. in Investments - (1) Cash Flow from Investing (477) (545) (477) 1,413 (115) (84) Issue of Equity Inc./(Dec.) in loans (78) (255) (62) Dividend Paid (Incl. Tax) (23) (23) (23) (8) (14) (14) Others (13) (9) (115) (1,2) (8) - Cash Flow from Financing (1,88) (277) (76) Inc./(Dec.) in Cash 11 (88) (161) (63) Opening Cash balances Closing Cash balances July 21, 21 1

11 Key Ratios Y/E March FY27 FY28 FY29 FY21 FY211E FY212E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA (13.1) EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA (6.5) Interest Coverage (EBIT / Interest) (1.5) July 21, 21 11

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. 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%) July 21, 21 12