Orchid Chemicals (Orchid)’ Q1FY2010 results are lower than our expectations. Its bottom line growth was lower than estimated due to a large marked-to-market (MTM) foreign exchange (forex) loss (owing to the revaluation of receivables) of Rs29.9 crore.
The revenues remained flat (up 0.8%) at Rs308.8 crore, which is above our estimate of Rs272.6 crore.
The revenues were largely achieved from the oral Cephalosporin products that served to counteract the impact of the competition in the injectable products, like Cefepime injections, Cefdinir tablets, and Cefoxitin and Cefazolin injections.
The flu season in the USA also resulted in an increase in the offtake of Orchid’s products during Q1FY2010.
The US generic business, in dollar terms, fell by 6.7% year-on-year (y-o-y) to $28.0 million but increased by 156.9% on a quarter-on-quarter (q-o-q) basis. Oral Cephalosporin continues to be the main revenue booster for Orchid in the US market.
The operating profit margin (OPM) expanded by 300 basis points to 30.7% in Q1FY2010. The other expenses dropped by 670 basis points as a percentage of sales due to a general cost reduction initiative implemented across the company.
However, the raw material cost spiked by 370 basis points due to a huge inventory build-up for Tazo-Pip in FY2009. Consequently, the operating profit increased by 11.9% to Rs94.9 crore.
The operating profit is above our estimate. We expect the margin to improve in the coming quarters on the back of a stabilising local currency and a ramp-up in formulation sales to the regulated markets with the full year impact of the Tazo-Pip launch in the European Union and the impending launch of Tazo-Pip in the USA upon receipt of the approval from the US Food and Drug Administration (USFDA).
At the net level, Orchid has reported a loss of Rs29.8 crore for Q1FY2010. The loss was due to a flattish top line growth, a higher than expected interest cost (up by 70.8% yoy), a forex MTM loss on liabilities of Rs30 crore (due to the revaluation of receivables) and an exceptional loss of Rs3.6 crore (adoption of revised AS-11). The net profit reported by the company is below our estimate.
Outlook and valuation
In spite of Q1FY2010 being a modest quarter, the management expects the next few quarters to be eventful. The company expects to launch Tazo-Pip in the USA by H2FY2010, in line with our assumptions.
Also, the revenues from the European Union for Tazo-Pip have started to trickle in from Q1FY2010. The launch of Tazo-Pip in the USA, and the incremental earnings from Penems and non-antibiotics would drive the growth beyond 2010.
At the current market price of Rs95, Orchid is discounting its FY2011E earnings by 5.8x. The possible approval of Tazo-Pip in the next few months and the strong visibility of product launches over FY2010 and FY2011 could result in a marked re-rating of the stock.
Hence, looking at the future event triggers, we maintain our BUY recommendation on the stock with a price target of Rs163.
The approval and launch of Tazo-Pip in the USA, and the reduction in the debt levels and interest costs would act as major triggers for the stock in the near-term.