Orchid Pharma Beats FY11 guidance ::Macquarie Research

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Orchid Pharma
Beats FY11 guidance
Event
 OCP reported FY11 sales of Rs17.2b (up 33% YoY), EBITDA of Rs4.2b and
PAT of Rs1.56b. The EBITDA margin was 23.5%. Adjusting for the asset sale
to Hospira in FY10, sales growth was ~60% YoY. Results were well ahead of
our estimates and company guidance. OCP announced that a fund-raising
resolution of a maximum Rs10bn (including equity and debt) has been
considered by the board primarily for upcoming FCCB repayment. We
maintain our OP rating. Lack of financial discipline or higher than anticipated
equity dilution remain key risks to our investment thesis.

Impact
 Strong operational performance; beats guidance: OCP beats FY11
guidance (sales: US$350m, EBITDA margin: 22%, PAT: Rs1.4b), with
reported sales at ~US$400m, EBITDA margin at 23.5% and PAT at Rs1.56b,
which was ~10-15% more than the guidance. This was on the back of supply
of high-margin products (penems and Tazo-pip) under long-term contracts.
 FY12 guidance ahead of our estimates: OCP guided for FY12 net sales at
US$500m (25% growth), EBITDA margin at 24%, PAT at Rs2.1b, which is
~10% higher than our earlier estimate for FY12.
 Fund raising for FCCB repayment: OCP has FCCB repayment (US$163m)
due in Feb-2012. OCP announced that a fund-raising resolution of maximum
Rs10bn has been considered by the board. We have already factored equity
dilution of ~15m shares (equivalent to FCCB equity conversion) into our
model. We expect any shortfall to be met by additional debt. Higher equity
dilution remains a risk. OCP Net debt ~Rs16.3b & debt/equity ~1.5x.
 Imipenem approval expected in 1QFY11: The upcoming launch of
Imipenem by HSP and supply of bulk for Add Vantage device should boost
growth in FY12. Given the limited competition for the products under contract,
we expect this to be a significant growth driver, with EBITDA margin >30%.
 Significant improvement in Working capital: Receivable/Inventory days
came down to 105/126 days (200/164 days in FY10). Management guided for
further improvement to 90 days in both receivables and inventory days.
Earnings and target price revision
 We increase our FY12/13E EPS to Rs24.7/29.5 from Rs21.5/25.4 on better
operational visibility. Our TP is based on EV\EBITDA and remains the same
due to lower multiple assumption but higher estimated debt at end of FY11.
Price catalyst
 12-month price target: Rs415.00 based on a EV/EBITDA methodology.
 Catalyst: Imipenem and Cilastatin approval
Action and recommendation
 Valuations are attractive, in our view, with OCP trading at a PER of 11.7x
FY12E diluted EPS, despite our estimated 28% EPS CAGR for FY11–13. We
maintain our Outperform rating and target price of Rs415.