Orchid Pharma rises from ashes, expects to make profits in 12 months

Dhanuka Pharmaceuticals that took over the company almost a year ago, nursed it back to health from bankruptcy

Chennai-based Orchid Phar­ma’s stock touched Rs 2,129 on Thursday, up more than 11,700 per cent from Rs 18 in November 2020, bringing cheer to Dhanuka Labora­tories (DLL), which took over the company almost a year ago, under the National Company Law Tribunal (NCLT) resolution process. While the gains have been phenomenal, experts advise caution.
 
Though Orchid was under the Insolvency and Bank­ruptcy Code (IBC) process, the company’s four plants were operational. The new management infused money for the company’s operations and research capabilities.
 
DLL officials say demand for Orchid’s products is growing and given strong client relationships, most of its customers are back with the firm. The acquisition of Orchid Pharma will help DLL expand its presence in the regulated markets — it operates in the non-regulated/semi-regulated markets currently. DLL reckons loss-making Orchid will deliver 20-25 per cent growth and return to profit in 6-12 months.
 
Market analyst Ambareesh Baliga said the main factors helping the stock are capital restructuring and the new management take over. The company’s balance sheet is also in better shape now. People who held 1,000 shares before the stock was suspended (July 2019) were allotted only 4 shares under the new scheme of arrangement. “With the new management taking over, the ideal value of the share should be Rs 2,600-2,700 taking into account low floating stocks and pre-suspension market cap,” said Baliga.
 
Some analysts, however, say investors should adopt a cautious approach given that the company is yet to turn profitable and has been making losses each year since FY13 barring a year in between. An analyst at a domestic brokerage believes that it will be difficult to expand presence, increase sales and report profits unless there are confirmed contracts and utilisation levels of the plants are high. Moreover, pricing pressures and compliance requirements of plants, especially for sales to regulated markets, would be key challenges.

 
The sharp surge in the stock price is also a result of low floating stock as 98.07 per cent of the equity is held by promoters. Finally, valuations at 18 times FY20 sales are also on the expensive side, said analysts.
Rating agency CARE in September 2019 withdrew ratings for Orchid Pharma after the company did not disclose information. In October 2020, the latest report from CARE, it rated the company as stable.
 
The ratings assigned to Orchid Pharma (Orchid) take into account the change in management and control of the company post the restructuring under NCLT-approved process. While the rating draws comfort from the new promoter’s experience in the pharmaceutical industry and infusion of funds to aid the com­pany’s operations, the ratings are constrained by the low capacity utilisation of Orchid's facilities and moderate debt coverage indicators.
 
During April 2020 to December 2021, Orchid reported a consolidated net loss of Rs 91.80 crore as against a loss of Rs 92.21 crore, a year ago.
 
In this backdrop, how soon the new management can deliver on its promises will determine the future returns for shareholders.