Orchid's attractions

If indeed promoters of Ranbaxy are looking to buy a stake in the Rs 985 crore Orchid Chemicals through Solrex, there is good reason for it.

Orchid is into a good business: it earns most of its revenues (consolidated turnover of Rs 908.5 crore in the first nine months of FY08) from the manufacture and exports of cephalosporins-- medication for treating infection caused by bacteria.

The Chennai-based firm, which posted an operating profit of Rs 277 crore in FY07. also makes active pharmaceutical ingredients and finished dosage forms for cephalosporins.

The Rs 6,942 crore Ranbaxy has a presence across cardio-vasculars, urology and dermatology but only a small presence in cephalosporins.

As a category, cephalosporins are understood to be growing fast "" more than 8 per cent annually "" in key markets such as the US and Europe and moreover, the competition in the space is limited.

The segment is fairly profitable: Orchid's operating profit margin rose 1170 basis points to 28 per cent in FY07 and exports account for about 71 per of sales.

As such, an association with Orchid, would give Ranbaxy's promoters not only access to the manufacturing facilities in Tamil Nadu and Maharashtra but more importantly the existing client base.

Of equal importance is that several patents in the anti - bacterial segment are set to expire in 2009 and 2010 in US and Europe and that will allow Orchid to launch some of its products following regulatory approvals. Ranbaxy would thus be in a position to leverage Orchid's expertise in this space.

The Orchid stock has gained 37 per cent in three sessions and at Rs 240, trades at a reasonable 12 times estimated FY 09 earnings. At Rs 471, Ranbaxy trades at 19.6 times estimated CY08 earnings.

The French connection

India's biggest auto component player Bharat Forge is looking to buy French forgings company, Sifcor. While the acquisition could give the Pune-based firm a foothold in the French automobile market, industry watchers believe that may not be the best way to go about it.

That's because labour laws in France are understood to be strict and the environment, say industry watchers, is not the easiest to work in.

However, the deal, if concluded will result in the Rs 4178 crore company adding to its list of marquee clients in Europe because Sifcor supplies to companies such as PSA Citroen and Renault.

Analysts feel that while access to these companies is important, Bharat Forge will not find the going easy and buying manufacturing units may not really help the company too much.

What could make the acquisition worthwhile is a good price. Bharat Forge is known to swing the best deals""all its previous acquisitions, and it has done several, have been bargains and come at very reasonable valuations of between 0.3-0.5 times sales. So if it able to buy a controlling stake in Sifcor at say 0.5 times sales or thereabouts, the deal will be well worth it.

Groupe Sifcor's revenues are about 172 million euros or around Rs 1,150 crore, so Bharat Forge should not ideally pay more than Rs 600 crore. Making its overseas operations more profitable hasn't been easy for Bharat Forge: in the December quarter, the performance of most of its subsidiaries was below expectations.

The US operations, in particular, didn't fare too well though the company is hoping to break even in China very soon. At Rs 275.

Bharat Forge is expected to end FY08 with revenues of Rs 460 crore and profits of Rs 315 crore. At the current price of Rs 275, the stock trades at just under 18 times FY09 estimated earnings.