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Orchid Chemicals (Orchid) reported mixed performance for 2QFY2011. While
net sales growth surprised positively, the high growth in net profit was mainly
driven by other income (Alvogen deal and MTM gains) and low tax charges. For
FY2011, the company reiterated its guidance of top-line growth of 23% to
`1,600cr with EBITDA margins (including other operating income) of 22%. The
company plans to incur `200cr in FY2011. However, concerns on the balance
sheet front persist (high receivable days and low fixed-asset turnover ratio). We
remain Neutral on the stock.
Results above expectations: For the quarter, Orchid reported net sales of `368cr
(`305cr), up 20.8% driven by the Hospira contract and commencement of
Meropenem API supply to other players also. Further, on the API front
(ex-Hospira), the company is witnessing strong growth in the emerging markets.
Orchid reported OPM of 17.5% (excluding other operating income) which was
below expectation mainly due to higher SG&A expenses, which came in at
`100cr (`81cr), up 24.0% yoy. Orchid reported net profit of `24cr (loss of `13cr)
driven by sales growth, higher other income and lower tax charges.
Outlook and Valuation: We expect the company to post net sales of `1,302cr,
with EBITDA margin of 21.0% (including other operating income) in FY2011.
Even post the Hospira deal, the high receivable days and low fixed-asset turnover
ratio remains a cause of concern. The stock is currently trading at 23.7x
FY2011E and 18.2x FY2012E earnings. We remain Neutral on the stock.
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