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Orchid Pharma: Cephalosporin drives growth - Views on News from Equitymaster

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Orchid Pharma: Cephalosporin drives growth

Dec 26, 2003

Orchid Chemicals & Pharmaceuticals (OCP) is mainly into the manufacture of bulk drugs, formulations and nutraceuticals. The company is the largest manufacturer and exporter of cephalosporin bulk drugs in India and is amongst the top five producers in the world. OCP recently announced its September quarter results. The company has emerged as a preferred choice for Cephalosporin bulk drug, and is reaping the benefits of the same. The company reported a 45% growth in topline and a robust 153% bottomline growth during the quarter.

Results at a glance ...
(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales 1,113 1,618 45.4% 2,182 3,348 53.4%
Other Income 3 1 -48.0% 3 6 109.2%
Expenditure 891 1,229 37.8% 1,739 2,632 51.3%
Operating Profit (EBDIT) 222 389 75.5% 442 715 61.7%
Operating Profit Margin (%) 19.9% 24.1%   20.3% 21.4%  
Interest 103 166 60.8% 179 277 54.8%
Depreciation 87 135 55.6% 189 273 44.4%
Profit before Tax 35 90 159.5% 78 172 121.7%
Tax 6 17 195.4% 20 23 18.6%
Profit after Tax/(Loss) 29 73 152.5% 58 149 156.4%
Net profit margin (%) 2.6% 4.5%   2.7% 4.4%  
No. of Shares (m) 28 32.4   28 32.4  
Diluted Earnings per share (Rs)* 3.6 9.0   3.6 9.2  
P/E Ratio   29.0     28.5  
(* annualised)            

During 2QFY04, OCP's bulk drug business (namely cephalosporin) contributed 83% (as against 88% in 2QFY03) to the total gross revenues with the formulations business making up for the rest. Buoyed by introduction of new products and exports, the company's cephalosporin business recorded an impressive 35% growth during 2QFY04 (Rs 1,391 m). Although the formulations business also recorded an impressive 93% growth on the back of strong sales in the Russian and Latin American markets, OCP registered operating losses from this business during the quarter under review.

Revenue mix by segment
(Rs m) 2QFY03 2QFY04 % change 1HFY03 1HFY04 % change
Segment Revenues
Bulk drugs 1,028 1,391 35.3% 2,000 2,921 46.0%
Formulations 145 280 93.0% 264 558 111.6%
Total 1,173 1,671 42.5% 2,264 3,480 53.7%
Segment Results (Profit before tax and interest)
Bulk drugs 117 257 119.2% 237 421 77.8%
Formulations 18 (3) -114.3% 17 21 27.9%
Total 135 254 88.3% 253 442 74.5%

On the operations front, OCP registered a 420 basis point improvement in operating profit margins. Although raw material and staff cost as a percentage of net sales increased by 2.2 percentage points and 0.6 percentage points respectively, a sharp drop in other expenditure from 30.2% of net sales in 2QFY03 to 23.2% in 2QFY04 helped the company improve its operating efficiencies. An improvement in operating margins coupled with a less than proportionate rise in interest cost and depreciation provision has helped the company register a sharp 152% growth net profit.

At Rs 262, OCP is trading at a P/E of 29x annualised 1HFY04 earnings. Given the relatively smaller size and bulk drugs focus on the company, the valuations seem to be stretched. This apart, almost 83% of OCP's September quarter gross revenues were from its cephalosporin bulk drugs business. However, given the company's US-FDA approved plant and joint venture in China, OCP is well placed to capitalize on the contract manufacturing opportunities that may come its way.

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