1. Event Update | Pharmaceutical
June 10, 2010
Orchid Chemicals NEUTRAL
CMP Rs151
Building blocks again... Target Price -
Orchid Chemicals (Orchid) has announced entering into an agreement to acquire Investment Period -
the US-based generic marketing and sales service company, Karalex Pharma,
Stock Info
through an all-cash deal. Though the company has not disclosed the purchase
consideration, it is estimated to be in the range of 2-2.5x Price/Sales. Orchid Sector Pharmaceutical
proposes to fund the deal through internal accruals, as it has residual cash of Market Cap (Rs cr) 1,064
Rs300cr from the Hospira deal. On a conservative basis, we expect the deal to Beta 1.2
contribute US $10mn in FY2011E and US $15mn in FY2012E to Orchid's Top-line,
52 Week High / Low 239/78
with EBITDA Margins to be in line with current levels of 17-18%. With this acquisition,
Orchid will get front-end presence in the US and reach its customers directly, which Avg Daily Volume 662125
would increase overall Margins of its US generic business contributing 13% of Face Value (Rs) 10
FY2011E Sales. However, concerns regarding the high Debtors (180 days) and BSE Sensex 16,922
low Return Ratios (9%) persist. Hence, we maintain a Neutral on the stock.
Nifty 5,079
About Karalex Pharma: A generic marketing and sales services company, Karalex
Karalex
Reuters Code ORCD.BO
is focused exclusively on the US Healthcare market. The company formed in 2007
has launched over 100 generic pharmaceutical products with a combined value Bloomberg Code OCP@IN
in excess of US $1bn. The company has recorded Top-line of US $10mn along
with double-digit Operating Margins. Shareholding Pattern (%)
Benefits of the deal: Through this deal, Orchid will establish its front-end presence Promoters 26.0
in the largest pharmaceutical market globally, USA. Though the company has not MF / Banks / Indian FIs 45.7
disclosed the purchase consideration, it is estimated in the range of 2-2.5x
FII / NRIs / OCBs 11.7
Price/Sales. Orchid proposes to fund the deal through internal accruals, as it has
Indian Public / Others 16.7
residual cash of Rs300cr from the Hospira deal. Further, Orchid plans to launch
15 generic products in the US through Karalex Pharma over the next few years. On
Abs. (%) 3m 1yr 3yr
a conservative basis, we expect the deal to contribute US $10mn in FY2011E and
US $15mn in FY2012E to Orchid's Top-line, while EBITDA Margins are expected to Sensex (1.0) 9.4 20.3
be in line with current levels of 17-18%. The acquisition would increase overall
Orchid (10.5) 19.9 (39.8)
Margins of the company's US generic business contributing 13% to FY2011E Sales.
Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 1,260 1,299 1,220 1,652
% chg 0.5 3.1 (6.0) 35.3
Profit
Recurring Net Profit (33.0) (553.6) 70.1 110.2
% chg - - - 57.2
Recurring EPS(Rs) - - 10.0 15.7
EBITDA Margin (%) 11.9 - 17.2 18.0
P/E (x) - - 15.2 9.6
RoE (%) - - 5.6 9.4 Kour
Sarabjit Kour Nangra
RoCE (%) 0.5 - 3.8 6.8 +91 22 4040 3800 Ext: 343
sarabjit@angeltrade.com
P/BV (x) 1.9 0.9 0.8 1.0
EV/Sales (x) 2.9 1.6 1.7 1.4 Sushant Dalmia
EV/EBITDA (x) 24.2 - 10.1 7.9 +91 22 4040 3800 Ext: 320
Source: Company, Angel Research sushant.dalmia@angeltrade.com
Please refer to important disclosures at the end of this report

2. Orchid Chemicals | Event Update
Outlook and Valuation
Orchid's FY2010 results were disappointing especially on the Operating front, which
was marred by Inventory and Debtor write offs to the tune of Rs235cr. Even post the
write offs on the Debtors' front, receivable days at 180 continues to be on the higher
side. On the Debt front, even though the company repaid Debt to the tune of Rs1,400cr
in 4QFY2010, its Debt/Equity ratio continues to higher than the Industry average at
1.1x as on FY2010. However, on the positive side, the company has commenced
supply of Tazo+Pip API to Hospira and expects to begin supply of the Penems API to
Hospira and one more player by the end of 1QFY2011.
We have marginally tweaked our Sales estimates to factor in the acquisition of Karalex
Pharma. We estimate Net Sales to increase by 4.0-4.3%, while Net Profit is expected
to increase by 10-11% over FY2011-12E.
Exhibit 1: Revised Estimates
Old Estimate New Estimate % chg
Parameter FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E
Sales (Rs cr) 1,174 1,584 1,220 1,652 4.0 4.3
OPM (%) 17.2 18.0 17.2 18.0 - -
Net Profit (Rs cr) 63.6 99.2 70.1 110.2 10.2 11.1
EPS (Rs) 9.0 14.1 10.0 15.7 10.2 11.1
Source: Company, Angel Research
We expect the company to register 12.8% CAGR in Net Sales to Rs1,652cr over
FY2010-12E and EPS to touch Rs15.7 in FY2012E. On the bourses, during the last six
months, the stock witnessed a sharp correction of 29% and is currently trading at fair
valuations of 15.2x and 9.6x FY2011E and FY2012E Earnings, respectively. Hence,
Fair Value
we maintain a Neutral on the stock, with a Fair Value of Rs157.
Exhibit 2: One-year Forward EV/Sales
7,000
6,000
5,000 4x
EV (Rs cr)
4,000
3x
3,000
2x
2,000
1x
1,000
0
Apr-05
Dec-05
Apr-06
Dec-06
Apr-07
Dec-07
Apr-08
Dec-08
Apr-09
Dec-09
Apr-10
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Source: Company, Angel Research
June 10, 2010 2

3. Orchid Chemicals | Event Update
Profit & Loss Statement (Consolidated) Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Net Sales 926 1,253 1,260 1,299 1,220 1,652
Other operating income 32 45 33 45 42 44
Total operating income 959 1,298 1,293 1,343 1,262 1,696
% chg 2.5 35.4 (0.4) 3.9 (6.0) 34.3
Total Expenditure 697 961 1,110 1,500 1,011 1,354
Net Raw Materials 354 479 586 840 513 702
Other Mfg costs 102 155 149 - 146 182
Personnel 92 117 137 174 140 182
Other 149 210 238 486 211 289
EBITDA
EBITDA 229 292 150 (201) 210 297
% chg 14.1 27.5 (48.8) - - 41.6
(% of Net Sales) 24.7 23.3 11.9 - 17.2 18.0
Depreciation& Amortisation 85 101 134 155 108 114
EBIT 144 192 16 (356) 102 183
% chg 24.4 32.9 (91.8) - - 80.1
(% of Net Sales) 15.6 15.3 1.2 (27.4) 8.3 11.1
Interest & other Charges 99 82 156 242 80 107
Other Income 15 74 90 0 16 15
(% of PBT) 16.7 32.4 - - 20.3 11.4
Share in profit of Associates - - - - - -
Recurring PBT 93 229 (18) (554) 80 135
% chg (58.8) 146.8 - - - 70.1
Extraordinary Expense/(Inc.) - - 15.9 (892.9) - -
PBT (reported) 93 229 (34) 339 80 135
Tax 14.0 53.2 15.2 - 9.5 25.2
(% of PBT) 15.1 23.3 0.0 0.0 11.9 18.6
PAT (reported) 79 175 (49) 339 70 110
Add: Share of earnings of associate - - - - - -
Less: Minority interest (MI) - 0 - - - -
Prior period items - - - - - -
PAT after MI (reported) 79 175 (49) 339 70 110
ADJ. PAT
ADJ. PA 79 175 (33) (554) 70 110
% chg 37 123 - - - 57
(% of Net Sales) 8.5 14.0 - - 5.7 6.7
Basic EPS (Rs) 11.9 26.6 - 48.2 10.0 15.7
Fully
Adj Fully Diluted EPS (Rs) 11.9 26.6 - - 10.0 15.7
% chg 106 123 - - - 57
June 10, 2010 3

4. Orchid Chemicals | Event Update
Balance Sheet (Consolidated) Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity Share Capital 66 66 70 70 70 70
Reserves & Surplus 419 599 480 1,163 1,182 1,019
Funds
Shareholders Funds 485 665 550 1,234 1,252 1,089
Total Loans 1,649 1,971 2,616 1,303 1,359 1,429
Deferred Tax Liability 92 115 128 106 109 118
Total Liabilities 2,226 2,750 3,295 2,643 2,721 2,637
APPLICATION OF FUNDS
APPLICATION
Gross Block 1,468 2,003 2,601 2,064 2,218 2,327
Less: Acc. Depreciation 458 558 688 642 750 864
Net Block 1,010 1,445 1,913 1,421 1,468 1,463
Capital Work-in-Progress 553 620 547 397 347 347
Goodwill 95 95 95 95 189 189
Investments 0 1 1 1 1 1
Current Assets 1,232 1,323 1,595 1,669 1,449 1,497
Cash 119 31 53 279 296 145
Loans & Advances 119 105 102 326 153 175
Other 995 1,187 1,441 1,064 1,000 1,178
Current liabilities 665 734 856 940 732 860
Net Current Assets 568 590 740 729 717 638
Total Assets 2,226 2,750 3,295 2,643 2,721 2,637
June 10, 2010 4

5. Orchid Chemicals | Event Update
Cash Flow Statement (Consolidated) Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Profit before tax 93 229 (34) (545) 80 135
Depreciation 85 101 134 155 108 114
(Inc)/Dec in Working Capital (184) (118) (117) 216 30 (73)
Direct taxes paid (1) (32) (3) - (6) (16)
Cash Flow from Operations (8) 179 (20) (175) 211 160
(Inc.)/Dec.in Fixed Assets (477) (545) (477) 81 (199) (109)
(Inc.)/Dec. in Investments - (1) - 1,748 - -
Cash Flow from Investing (477) (545) (477) 1,829 (199) (109)
Issue of Equity 11 1 110 - - -
Inc./(Dec.) in loans 620 392 546 (1,313) 19 (190)
Dividend Paid (Incl. Tax) (23) (23) (23) (82) (14) (14)
Others (13) (90) (115) (32) 0 -
Cash Flow from Financing
Financing 595 279 518 (1,428) 5 (204)
Inc./(Dec.) in Cash 110 (88) 21 227 17 (152)
Opening Cash balances 9 119 31 53 279 296
Closing Cash balances 119 31 53 279 296 145
June 10, 2010 5

6. Orchid Chemicals | Event Update
Key Ratios
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 12.6 5.7 - - 15.2 9.6
P/CEPS 6.1 3.6 10.5 - 6.0 4.7
P/BV 2.0 1.5 1.9 0.9 0.8 1.0
Dividend yield (%) 3.0 3.0 0.9 6.6 1.1 1.1
EV/Sales 2.7 2.3 2.9 1.6 1.7 1.4
EV/EBITDA 11.0 10.0 24.2 - 10.1 7.9
EV / Total Assets 1.1 1.1 1.1 0.8 0.8 0.9
Per Share Data (Rs)
EPS (Basic) 11.9 26.6 - 48.2 10.0 15.7
EPS (fully diluted) 11.9 26.6 - - 10.0 15.7
Cash EPS 24.9 41.9 14.3 - 25.3 31.8
DPS 4.5 4.5 1.3 10.0 1.7 1.7
Book Value 73.7 101.0 78.1 175.2 177.8 154.6
Dupont Analysis
EBIT margin 15.6 15.3 1.2 - 8.3 11.1
Tax retention ratio 84.9 76.7 - - 88.1 81.4
Asset turnover (x) 0.5 0.5 0.4 - 0.5 0.7
RoIC (Post-tax) 6.5 6.3 - - 3.9 6.2
Cost of Debt (Post Tax) 6.3 3.5 - - 5.3 6.3
Leverage (x) 2.2 3.0 3.8 - 0.8 1.0
Operating RoE 7.0 14.9 - - 2.7 6.2
Returns (%)
RoCE (Pre-tax) 7.1 7.7 0.5 - 3.8 6.8
Angel RoIC (Pre-tax) 9.8 11.1 0.7 - 5.4 9.5
RoE 12.5 30.5 - - 5.6 9.4
Turnover ratios (x)
Asset Turnover (Gross Block) 0.7 0.7 0.6 0.6 0.6 0.7
Inventory / Sales (days) 202 177 200 161 125 104
Receivables (days) 139 129 171 180 173 130
Payables (days) 111 95 109 98 122 82
Working capital cycle (ex-cash) (days) 331 142 176 154 126 98
Solvency ratios (x)
Net debt to equity 3.2 2.9 4.7 0.8 0.8 1.2
Net debt to EBITDA 6.7 6.6 17.1 - 5.1 4.3
Interest Coverage (EBIT/Interest) 1.5 2.3 0.1 - 1.3 1.7
June 10, 2010 6

7. Orchid Chemicals | Event Update
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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section).
Disclosure of Interest Statement Orchid Chemicals
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
June 10, 2010 7

8. Orchid Chemicals
Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel : (022) 3952 4568 / 4040 3800
Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angeltrade.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angeltrade.com
Vaishali Jajoo Automobile vaishali.jajoo@angeltrade.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angeltrade.com
Anand Shah FMCG , Media anand.shah@angeltrade.com
Deepak Pareek Oil & Gas deepak.pareek@angeltrade.com
Puneet Bambha Capital Goods, Engineering puneet.bambha@angeltrade.com
Sushant Dalmia Pharmaceutical sushant.dalmia@angeltrade.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angeltrade.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@angeltrade.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angeltrade.com
Viraj Nadkarni Retail, Hotels, Mid-cap virajm.nadkarni@angeltrade.com
Paresh Jain Metals & Mining pareshn.jain@angeltrade.com
Amit Rane Banking amitn.rane@angeltrade.com
Rahul Jain IT, Telecom rahul.j@angeltrade.com
Jai Sharda Mid-cap jai.sharda@angeltrade.com
Sharan Lillaney Mid-cap sharanb.lillaney@angeltrade.com
Amit Vora Research Associate (Oil & Gas) amit.vora@angeltrade.com
V Srinivasan Research Associate (Cement, Power) v.srinivasan@angeltrade.com
Aniruddha Mate Research Associate (Infra, Real Estate) aniruddha.mate@angeltrade.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angeltrade.com
Chitrangda Kapur Research Associate (FMCG, Media) chitrangdar.kapur@angeltrade.com
Vibha Salvi Research Associate (IT, Telecom) vibhas.salvi@angeltrade.com
Pooja Jain Research Associate (Metals & Mining) pooja.j@angeltrade.com
Technicals:
Shardul Kulkarni Sr. Technical Analyst shardul.kulkarni@angeltrade.com
Mileen Vasudeo Technical Analyst vasudeo.kamalakant@angeltrade.com
Derivatives:
Siddarth Bhamre Head - Derivatives siddarth.bhamre@angeltrade.com
Jaya Agarwal Derivative Analyst jaya.agarwal@angeltrade.com
Sandeep Patil Jr. Derivative Analyst patil.sandeep@angeltrade.com
Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angeltrade.com
Abhimanyu Sofat AVP - Institutional Sales abhimanyu.sofat@angeltrade.com
Nitesh Jalan Sr. Manager niteshk.jalan@angeltrade.com
Pranav Modi Sr. Manager pranavs.modi@angeltrade.com
Sandeep Jangir Sr. Manager sandeepp.jangir@angeltrade.com
Ganesh Iyer Sr. Manager ganeshb.Iyer@angeltrade.com
Jay Harsora Sr. Dealer jayr.harsora@angeltrade.com
Meenakshi Chavan Dealer meenakshis.chavan@angeltrade.com
Gaurang Tisani Dealer gaurangp.tisani@angeltrade.com
Production Team:
Bharathi Shetty Research Editor bharathi.shetty@angeltrade.com
Bharat Patil Production bharat.patil@angeltrade.com
Dilip Patel Production dilipm.patel@angeltrade.com
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