Orchid’s performance in Q4FY2008 and FY2008 has been mixed. The top line growth driven by niche product opportunities has surpassed expectations. However, strong margin pressure due to sharp escalations in the raw material cost and the higher than expected interest burden dragged down profitability.
Company’s business model is focused on niche opportunities and has strong growth drivers. Despite this, we are concerned about the high debt levels despite further equity dilution that occurred in the beginning of FY2008 to reduce debt. The never-ending capex despite the company’s stance of having completed its major investments is also a cause for concern.
The management has stated its intention of reducing its debt level further in the coming years, though we are yet to see the effect of the same on the company’s financials.
Despite the strong growth drivers and a robust business model, we believe the above-mentioned concerns will remain as an overhang on the stock, until the company’s financials clearly reflect the management’s intentions of reducing the debt further.
In view of these concerns, we are reducing our target price/earnings multiple for Orchid to 14x and rolling over our valuations to FY2010E earnings. We maintain our BUY recommendation on the stock with a revised price target of Rs300.