1QFY2013 Result Update | Pharmaceutical

August 14, 2012

Orchid Chemicals
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Adjusted net profit 1QFY2013 365 42 12 (46) 4QFY2012 485 44 45 17 %chg (qoq) (24.8) (4.1) (73.1) 1QFY2012 413 36 54 18 %chg (yoy) (11.7) 16.1 (77.6) -

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 747 1,322 1.4 213 / 104 476,316 10 17,728 5,380 ORCD.BO OCP@IN

`106 `140
12 months

Source: Company, Angel Research

Orchid

Chemicals

(Orchid)

reported

lower-than-expected

numbers

for

1QFY2013. For the quarter, the net sales came in at `365cr, much lower than the
estimated `500cr. However, the main disappointment came on the operating

front, where the OPM came in at 3.3%, on the back of lower sales and rupee (INR) deprecation. This led the company to post a loss of `46cr during the quarter. Although the stock has declined sharply, given the valuations, we maintain our Buy view on the stock. Lower-than-expected performance: For the quarter, on a consolidated level, Orchid reported net sales of `365cr, a decline of 11.7% yoy. The companys gross margin declined by 10.9% to 37.7%; which resulted in OPM coming in at 3.3% vs 13.0% in the corresponding period last year. This along with a higher interest expenditure led to a net loss at `46cr vis--vis expectation of net profit of `32cr. Outlook and valuation: We expect Orchid to post net sales of `2,434cr, with EBITDA margin of 16.0% in FY2014E. The stock is currently trading at 8.4x FY2013E and 6.1x FY2014E earnings. We maintain our Buy rating on the stock with a revised target price of `140. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Recurring net profit % chg EBITDA margin (%) Recurring EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 32.4 26.7 17.7 23.2

Abs.(%) Sensex Orchid

3m 9.3 (23.8)

1yr 5.3 (46.5)

3yr 15.0 1.5

FY2011 1,717 32.2 154 20.5 22.2 4.8 0.8 15.2 7.4 1.4 7.0

FY2012E 1,839 7.1 96 (38.0) 16.3 13.6 7.8 0.7 8.5 4.8 1.2 7.4

FY2013E 2,117 15.1 89 (7.5) 16.0 12.6 8.4 0.7 7.3 5.7 1.1 6.6

FY2014E 2,434 15.0 123 39.1 16.0 17.5 6.1 0.6 9.4 6.7 0.9 5.5

Sarabjit Kour Nangra

+91 22 39357600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Orchid Chemicals | 1QFY2013 Result Update

Exhibit 1: 1QFY2013 performance (Consolidated)

Y/E March (` cr) Net Sales Other Income Total Income Gross Profit Gross Margin (%) Operating Profit Operating Margin (%) Interest Depreciation & Amortisation PBT before Exceptional Items Exceptional Items ( loss )/gain Profit Before Tax Provision for Taxation Reported Net Profit Adjusted Net Profit EPS (`)
Source: Company, Angel Research

1QFY2013 365 42 407 137 37.7 12 3.3 72 41 (59) (8) (67) (13) (54) (46) -

4QFY2012 485 44 529 255 52.5 45 9.2 59 42 (13) (2) (15) (30) 15 17 2.5

%chg (qoq) (24.8) (4.1) (23.1) (46.1) (73.1) 21.1 (2.4) 347.0 -

1QFY2012 413 36 449 201 48.6 54 13.0 31 36 23 (1) 22 5 17 18 2.6

%chg (yoy) (11.7) 16.1 (9.5) (31.5) (77.6) 132.0 12.8 -

FY2012 1839 171 2010 963 52.3 322 17.5 180 154 159 (84) 75 (22) 97 181 25.7

FY2011 1717 131 1847 848 49.4 274 15.9 117 134 154 18 172 15 156 138 19.7

%chg (yoy) 7.1 30.7 8.8 13.5 17.8 54.0 15.2 (56.0) (37.6) 31.0

Exhibit 2: Actual vs estimates

(` cr) Net sales Other income Operating profit Tax Adjusted net profit
Source: Company, Angel Research

Actual 365 42 12 (13) (46)

Estimates 500 36 85 8 32

Variation (%) (27.1) 16.1 (85.8) -

Below expectations revenue growth: For the quarter, on a consolidated level, Orchid reported net sales of `365cr, registering a decline of 11.7% yoy. In terms of filings, the cumulative filings of Abbreviated New Drug Applications (ANDAs) in the US stood at 43 which include 8 Para-IV FTF (firsttofile) applications. The company has already settled with the innovators for 4 FTF products and plans to launch these products as per the agreed terms. Of the total ANDAs filed around 13 are in the Cephalosporin product segment and 30 in the NPNC product space.

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Orchid Chemicals | 1QFY2013 Result Update

Exhibit 3: Sales trend

550 500 459 450

(` cr)

482

485

413 365

400 350 300 250 1QFY2012 2QFY2012 3QFY2012 4QFY2012

1QFY2013

Source: Company, Angel Research

OPM at lowest in near times on back of significant gross margin contraction: The companys gross margin declined by 10.9% to 37.7%; which resulted in OPM coming in at 3.3% vs 13.0% during the last corresponding period. Going into FY2013, top-line growth is expected to aid the company to report an OPM of 23-24%.

Exhibit 4: OPM trend (%)

25.0 21.2 20.0 15.0 23.0

(%)

10.0 5.0 0.0

13.0

9.2

3.3

1QFY2012

2QFY2012

3QFY2012

4QFY2012

1QFY2013

Source: Company, Angel Research

Consequently, company reported net loss during the quarter: This along with higher interest expenditure led to a net loss at `46cr vis--vis an expectation of net profit of `32cr.

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Orchid Chemicals | 1QFY2013 Result Update

Exhibit 5: Adjusted net profit trend

40 30 20 10 19 27 18 35

(` cr)

0 (10) (20) (30) (40) (50) (46) 1QFY2012 2QFY2012 3QFY2012 4QFY2012 1QFY2013

Source: Company, Angel Research

Management takeaways
API:Formulation mix to improve to 50:50 in the next two years. Targeted 1.1x Debt:Equity for FY2013. Plan to convert the rupee loan of `600cr into dollar to bring down its effective cost of funds to 5-6% in FY2013. Capex of around `200cr (including the maintenance capex) in FY2013.

Recommendation rationale
Supply agreements to drive growth: Growth for Orchid would be majorly led by its supply agreements with various players, with Hospira being the key contributor. In FY2010, Hospira took over the injectable business from Orchid. Subsequently, Orchid has entered into a 10-year exclusive agreement, wherein it would supply the active pharmaceutical ingredient (API) for the acquired generic injectable pharmaceuticals business to Hospira. Hospira contributed around 25% to total sales (FY2012), with the majority accruing through limited competition for products such as penems. Besides Hospira, Orchid has entered into various supply agreements with other players in the regulated as well as non-regulated markets. The company has started supplying API to a leading Japanese company under a contract for the next five years. Orchid has also entered into an agreement with another company for the supply of API (Carbopenem). Apart from these, the company is expected to start supplies of API for a new product for one of its MNC clients, which is expected to reflect in 3QFY2013 and 4QFY2013. These supply agreements are expected to boost the companys overall growth. We expect net sales to increase by 15.0% to `2,434cr in FY2014. While the contribution of API : Formulation has been around 75:25 in FY2012, the management expects the contribution to be 50:50 by FY2015E. Balance sheet in a healthy shape: Orchid faced debt pressure with interest cost rising to `242cr and losses on the operating front in FY2010. Repayment of debt through the proceeds received from Hospira led to net debt/equity dropping from
August 14, 2012

Orchid Chemicals | 1QFY2013 Result Update

4.7x FY2009 to almost 1.5x in FY2012. Going forward, the company expects the company to further de-leverage its balance sheet and reduce its debt levels, making its debt/equity comfortable at 1.1x FY2013. The shift to a more sustainable and robust business model has helped the company significantly de-leverage its balance sheet, with receivables reducing to 132 days (~180 days in FY2010) and inventory days reducing to 132 days (162 days in FY2010).

Outlook and valuation

We expect Orchid to post net sales of `2,434cr with EBITDA margin of 16.0% in FY2014E. The stock is currently trading at 8.4x FY2013E and 6.1x FY2014E earnings. We maintain our Buy rating on the stock with a revised target price of `140.

Exhibit 6: key assumptions

(` cr) Net sales growth (%) Operating margins (%) Net profit growth (%) Capex (` cr)
Source: Company, Angel Research

FY2013E 15.1 17.7 22.6 200

FY2014E 15.0 17.7 33.2 150

Exhibit 7: One-year forward EV/Sales

9,000 8,000 7,000 6,000

EV (` cr)

5,000 4,000 3,000 2,000 1,000 0

Source: Company, Angel Research

August 14, 2012

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
1x 2x 3x 4x

Orchid Chemicals | 1QFY2013 Result Update

Exhibit 8: Recommendation summary

Company Reco CMP Tgt. price Upside (`) Alembic Pharmaceuticals Buy Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Buy Neutral Accumulate Accumulate Neutral Neutral Buy Accumulate Accumulate Buy Neutral Neutral 60 108 2,178 868 349 94 2,100 60 410 575 106 500 668 (`) 91 166 953 379 1,859 92 435 647 140 51.0 53.3 9.8 8.6 12.9 54.2 6.2 12.5 32.1 6.6 8.3 20.9 18.8 16.8 17.7 8.3 25.5 6.7 11.2 18.9 6.1 16.8 23.6 FY2014E EV/EBITDA (x) 4.4 6.2 17.5 13.0 13.5 12.5 5.8 16.1 5.2 7.8 13.2 5.5 10.9 10.7 0.7 0.9 2.7 2.5 2.9 2.6 1.0 5.0 0.8 1.6 2.6 0.9 1.7 4.5 FY12-14E 14.6 61.1 12.0 22.3 13.5 2.3 26.6 13.6 33.3 28.7 29.1 13.4 44.8 0.1 FY2014E RoE (%) 29.9 16.4 17.0 26.8 16.8 20.8 8.8 29.0 16.3 26.1 24.7 9.4 28.9 18.8 29.4 10.4 16.1 20.2 15.2 15.1 8.7 38.9 15.6 26.0 22.9 6.7 15.8 26.7 % PE (x) EV/Sales (x) CAGR in EPS (%) RoCE (%)

Accumulate 1,646

Source: Company, Angel Research; Note: *December year ending

Background
Orchid Chemicals & Pharmaceuticals Ltd is a leading pharmaceutical company in India involved in the development, manufacture and marketing of diverse bulk actives, formulations and nutraceuticals. With exports spanning more than 75 countries, Orchid is the largest manufacturer-exporter of cephalosporin bulk actives in India and is ranked amongst the top 5-cephalosporin producers in the world. Orchids world-class manufacturing infrastructure including USFDA and UK MHRA approved API and oral dosage form facilities are located at Chennai and Aurangabad.

August 14, 2012

Orchid Chemicals | 1QFY2013 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Adj Fully Diluted EPS (`) % chg FY2009 1,273 13 1,260 33 1,293 (0.4) 1,110 586 149 137 238 150 (48.8) 11.9 134 16 1.2 156 90 (18) (107.8) (34) 15.2 0.0 (49) (49) (33) FY2010 FY2011 FY2012E 1,312 13 1,299 44 1,342 3.8 1,500 840 116 174 370 (202) (234.7) (15.5) 155 (356) (27.4) 242 10 (546) 2,958.5 470 130.6 27.8 339 339 (554) 48.2 1,731 14 1,717 69 1,786 33.0 1,366 869 155 165 332 351 (274.2) 20.5 134 218 (161.1) 12.7 117 0 0.0 170 1.9 172 15.4 9.0 156 156 154 9.1% 22.2 22.2 1,857 18 1,839 63 1,902 6.5 1,539 876 214 176 272 300 (14.7) 16.3 154 146 (33.0) 7.9 180 108 146.0 74 (56.6) 74 (22.0) (29.9) 96 96 96 (38.0) 5.2% 13.6 13.6 (38.7) FY2013E 2,136 19 2,117 81 2,198 15.5 1,778 883 251 251 394 339 13.0 16.0 167 172 17.7 8.1 156 14 12.4 111 50.2 111 22.1 20.0 89 89 89 (8%) 4.2% 12.6 12.6 (7.5) FY2014E 2,456 19 2,434 81 2,515 14.4 2,045 1,015 288 288 453 389 15.0 16.0 174 215 25.2 8.8 156 14 8.9 154 39.1 154 30.8 20.0 123 123 123 39% 5.1% 17.5 17.5 39.1

(91.8) (2,373.1)

15.9 (1,015.3)

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Orchid Chemicals | 1QFY2013 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. Exp. not written off Total Assets 2,601 688 1,913 547 95 1 1,595 53 102 1,441 856 740 3,295 2,250 741 1,508 469 95 1 1,700 335 206 1,160 972 729 2,802 2,526 872 1,654 602 99 1 1,716 222 362 1,131 950 766 3,120 3,138 1,026 2,113 215 99 1 1,340 179 380 782 858 483 2,910 3,338 1,192 2,146 215 99 1 1,675 321 444 910 986 689 3,149 3,488 1,367 2,121 215 99 1 1,957 399 511 1,047 1,134 822 3,258 70 480 550 2,616 128 3,295 70 885 955 1,644 203 2,802 70 999 1,069 2 1,856 194 3,120 70 1,110 1,181 3 1,556 170 2,910 70 1,185 1,255 3 1,721 170 3,149 70 1,294 1,364 3 1,721 170 3,258 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

August 14, 2012

Orchid Chemicals | 1QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances (524) 110 546 (23) (56) 577 21 31 53 429 (780) (8) (211) (998) 283 53 335 (408) 212 (14) (27) 171 (113) 335 222 (226) (299) (14) 7 (307) (44) 222 179 (200) 165 (14) 151 142 179 321 (150) (14) (14) 78 321 399 (3) (31) (524) (66) 852 429 (31) 124 (408) 22 489 (226) (22) 191 (200) (31) 242 (150) FY2009 FY2010 FY2011 (34) 134 (129) 470 155 294 172 134 (150) FY2012E FY2013E FY2014E 74 154 239 111 167 (64) 154 174 (55)

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Orchid Chemicals | 1QFY2013 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover(Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Int. 4.7 17.1 0.1 1.4 (6.5) (1.5) 1.5 4.6 1.9 1.2 4.6 0.8 1.1 4.1 1.1 1.0 3.4 1.4 0.6 200 171 109 176 0.6 162 179 83 147 0.7 106 128 98 96 0.7 128 132 105 81 0.7 139 142 105 56 0.7 142 145 105 57 0.5 0.7 7.4 10.6 15.2 4.8 6.3 8.5 5.7 7.0 7.3 6.7 8.5 9.4 1.2 0.4 3.8 12.7 91.0 0.7 7.7 6.1 1.4 10.0 7.9 129.9 0.7 7.0 13.7 1.3 (2.1) 8.1 80.0 0.8 5.1 7.6 1.1 2.3 8.8 80.0 0.9 6.2 7.2 1.0 5.2 14.3 1.3 78.1 48.2 12.6 135.6 22.2 22.2 40.8 1.7 151.8 13.6 13.6 35.4 1.7 167.6 12.6 12.6 36.3 1.7 178.2 17.5 17.5 42.2 1.7 193.6 7.4 1.4 1.2 2.6 22.1 1.0 0.8 11.9 1.6 (10.2) 0.7 4.8 2.6 0.7 1.6 1.4 6.8 0.8 7.8 3.0 0.6 1.6 1.2 7.1 0.7 8.4 2.9 0.6 1.6 1.0 6.3 0.7 6.1 2.5 0.5 1.6 0.9 5.3 0.6 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E

August 14, 2012

10

Orchid Chemicals | 1QFY2013 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Orchid Chemicals No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 14, 2012

11