orchid chemicals

Orchid Chemicals and Pharmaceuticals, historically a manufacturer of bulk drugs, has now entered the high-revenue, high-margin business of finished dosages in the USA. It has tied up with US counterparts for selling 16 anti-biotic formulations, representing a cumulative market size of US$3.2 billion in the USA, from 2006 onwards. This transition from a bulk drug manufacturer to an integrated manufacturer of formulations has resulted in higher valuations.
Orchid has made marketing alliances with US companies for the sale of 20 lifestyle drugs representing a market size of US$20 billion. By signing deals with companies such as Apotex, Par and Stada, Orchid is assured of a significant market share in the highly competitive US lifestyle market. Thus the lifestyle segment in the regulated markets provides a huge opportunity for the company from FY2008 onwards.
This year, Orchid has repaid Rs265 crore of its high-cost debt. Going ahead, we thus expect interest savings of close to Rs19 crore, which would add to the bottom line directly in FY2007. As a result we expect the net profit margin (NPM) of Orchid to increase from 4.6%in FY2005 to 13.9% in FY2007. We expect the profit after tax (PAT) to increase 4.5 times from Rs31 crore in FY2005 to Rs138 crore in FY2007, at a compounded annual growth rate (CAGR) of over 110%. These figures indicate the company's huge potential, which should materialise over the coming years.
At the current market price of Rs254, Orchid is trading at 7.5x its FY2007E cash earnings per share (EPS); that is a deep discount to its peers like Lupin and Torrent Pharma. Hence we assign it a price/cash earnings (PE) multiple of Rs10.5 for FY2007 and initiate a Buy recommendation with an 18-month price target of Rs355