Focus to shift on balance sheet de-leveraging We believe that approval of Tazo+Pip in the US with six months exclusivity is a big positive for Orchid Chemical.
The product is expected to contribute $84million to its top-line during the exclusivity period and would be a limited competition opportunity for the company even in FY2011E.
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Following the Tazo+Pip approval, we believe the focus will now shift towards de-leveraging its balance sheet as Orchid’s debt levels have been on the higher side since the past few years on account of high front-end capex, and revenues flowing only from its Cephalosporin facility. In the last three years, the company incurred capex of Rs1,500 crore.
Orchid also has a significantly high working capital cycle. On the bourses, the stock, in the last few sessions has rallied an unprecedented 28% factoring in the positives from the approval.
At Rs164, the stock is trading at 7.5x FY2011E earnings and 1.7x FY2011E EV/Sales. We recommend an ACCUMULATE on the stock, with a revised target price of Rs175 (Rs110) and believe further re-rating of the stock hereon would be driven by balance sheet de-leveraging.