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Saturday, March 22, 2008

Orchid Chemicals - A Retrospective Analysis

Lot of mails and speculation has been offlate floating around Orchid Chemicals. The stock had its market cap wiping off by half in just two trading sessions.

Orchid had topped our recommendation List for quiet sometime now. We initiated a Buy at Rs. 222/- last year, after which it hit a high of Rs. 328/- almost near our recommendation target and then it has all the way crashed to current market price of Rs. 116/-. Let us take a retrospective analysis of what happened and what looks ahead of Orchid Chemical.

Most of you by this time know the reason for the steep fall, Bear Stearns which was acquired by JP Morgan offloaded its stake in Orchid Chemical to ease its liquidity crunch. Sudden liquidity in this stock was even more aggravated when the margin call on a particular portion of promoters stock got triggered of selling another 7.9% stake in the firm.

Question remains

1) Is it legal to increase the stake through borrowed funds on margin?

We do not see anything wrong in that. Looking at the brighter part the promoters had faith in growth of the firm and so increased stake in the company through the route of borrowing money.

2) What is the future of the company?

The company is fundamentally strong and will remain so with lot of USFDA filing waiting for approval. Secondly many of major drugs going off-patented in the years to come is expected to benefit Orchid.

3) What to look ahead and when is the recovery possible?

We need to watch for the upcoming shareholding pattern for more information and also the current quarter results. We need to look at share holding pattern to see if any other institution had sold its stake. If so the liquidity floating the market can make it a speculators den.

Let us just understand that this is a huge personal loss for the promoter K Raghavendra Roa and going by the success story of Orchid he is not a guy who will get visibly rattled. Yeah true it will take him sometime to recover out of this loss. K Raghavendra Roa has scripted the success story of Orchid Chemical for almost 14 years now and let us hope he will continue to do so.

At the current market price the stock is available at less than 6 times its FY08E fully diluted EPS of 22. Also Orchid market cap is around 0.56 times it expected FY08 sales.

Orchid Chemicals also has unutilised foreign currency convertible bonds (FCCBs) amounting to US$193mn. With the stipulated conversion price for these FCCBs now at a significant premium to the current stock price, it is highly unlikely that the holders will exercise the option. This may leave Orchid with a significant loan obligation to be serviced in 2012.

Posted by Srivatsan

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2 comments:

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During fundamental analysis we look at a stock from three aspects

Company

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