Orchid Pharma- Muted quarter – Plant reopening key:: Macquarie Research,

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Orchid Pharma
Muted quarter – Plant reopening key
Event
 OCP announced its 1Q FY12 results. Consolidated net sales were Rs4.5bn
(up 36% YoY), EBITDA was Rs900m (up 7.4% YoY) and PAT was Rs169m.
Results were below estimate due to the 27-day planned shutdown of the
Aurangabad plant (for plant validation). Maintain Outperform.
 OCP has corrected ~25% since the cephalosporin API manufacturing facility,
located in Alathur (Chennai), was issued a Closure Notice by the Tamil Nadu
Pollution Control Board (TNPCB), citing some non-compliance with regards to
the disposal of solid waste. In our view, timely re-opening of the plant will be
critical (OCP guiding to 1H August) for OCP’s FY12 guidance to be achieved.
Impact
 Hospira contract remains the main driver; contribution 20% in 1Q FY12:
Given the limited competition for the products under contract (carbapenem,
Tazo Pip and ADD-Vantage), this is a significant growth driver, with EBITDA
margin above 30%. Given the Aurangabad plant is where Penens and Tazopip is manufactured, the 27-day planned shut-down impacted the reported
margins for the first quarter. The upcoming launch of Imipenem by HSP and
the supply of bulk for Hospira’s patented device, “Add Vantage,” should
further boost growth over the medium-term, in our view.
 Early resolution of TNPCB issues for Alathur plant critical: Almost ~40%
of the sales of the company come from this facility. We have now assumed
an end-August opening vs OCP guidance of 1H August. In our view, speed
with which OCP can resolve the issues with the TNPCB is going to be critical.
 Maintaining FY12 guidance: OCP continues to guide for FY12 net sales at
US$500m (25% growth), EBITDA margin at 25% and PAT at Rs2.1bn. Last
year OCP achieved 23% of its PAT guidance in 1H FY11 and 77% in 2H
FY12.
Earnings and target price revision
 We are revising our FY12/13E EPS to Rs22.4/28.2 from Rs24.7/29.5 to adjust
for the impact of closure of cephalosporin plant (30 to 40 days).Our base-case
scenario now assumes potential opening of the plant by end-August. Our TP
is revised to Rs340 (@ 8x EV/EBITDA; was earlier Rs415).
Price catalyst
 12-month price target: Rs340.00 based on an EV/EBITDA methodology.
 Catalyst: Cephalosporin plant reopening post resolution of PCB issues raised.
Action and recommendation
 Valuations look attractive, with OCP trading at a PER of 7.6x FY12E earnings.
We maintain our OP rating but see near-term pressure continuing on the
stock due to the outstanding TNPCB issues and the weak quarterly results.
 Extended delay in the resumption of the Cephalosporin plant could impact our
earnings estimates significantly and remains the key risk on the name