Orchid Pharma: Investec initiates coverage with ‘buy’, sees 23% upside – 5 key reasons

The brokerage has initiated coverage on the stock with a ‘buy’ call and a target price of ₹800.

ORCD is poised for robust growth in the next three years under the leadership of the new management, Dhanuka Group, effectively implementing a turnaround strategy and capitalising on ORCD’s strengths in Cephalosporin APIs. Management efforts have significantly boosted EBITDA over the past three years while reducing leverage, said the brokerage.

It also pointed out that the addition of the Production Linked Incentive (PLI) for 7ACA enhances ORCD’s position in the Ceph API market. The brokerage predicts a substantial over 35 percent EBITDA Compound Annual Growth Rate (CAGR) for the core business (excluding PLI) from FY23 to FY26.

Additionally, various strategic options, such as a global New Chemical Entity (NCE) launch, entry into India Branded business, collaboration with Shionogi for Contract Development and Manufacturing Organization (CDMO), and re-entry into the US market, could propel ORCD to new heights, added Investec.

The stock has jumped 67 percent in the last 1 year and 86.5 percent in 2023 YTD, giving positive returns in 7 of the 12 months so far. It has advanced 15 percent in December so far, extending gains after a 21 percent rise in November. However, it was in the red in the 3 months prior to that between August and October, down 18 percent.

In 2023, it shed the most in October, down almost 12 percent and rose the most in November, up 21 percent.

The stock hit its 52-week high of ₹678.40 last week on December 8, 2023. It has now added 97 percent from its 52-week low of ₹330, hit on January 1, 2023.

“The recommendation is to initiate a BUY with a target price (TP) of INR 800, based on 20 times the December 2025 earnings per share (EPS) and the net present value (NPV) of PLI,” said the brokerage.

Key Points:

Turnaround Progress: The turnaround at ORCD, led by Dhanuka Group’s management, focuses on cost control, revenue growth, and cash flow improvement. The goal is to transform ORCD into a globally integrated Cephalosporin company covering PLI, API, Cefiderocol CDMO, Branded India, and US Generic business, stated Investec.

Base Business Expansion: ORCD aims to boost revenue and EBITDA through the expansion of sterile/oral API capacities and the rebuilding of its US business. The merger with DLL is expected to create synergies and establish the combined entity as a market leader in Ceph, it further pointed out.

PLI-Driven Backward Integration: The PLI approval for 7ACA is seen as a strategic move, creating a moat through backward integration for ORCD’s Cephalosporin business. Despite not being factored into the base estimates, the PLI is given an NPV of INR 95 per share, mentioned the brokerage.

NCE Enmetazobactam: The potential USFDA approval for AMR indication in January 2024 could open avenues for global market approvals. ORCD stands to benefit from royalties on global sales and commercialisation rights for India, with significant upside potential, noted Invested.

Other Strategic Opportunities: Additional potential benefits from CDMO for Cefiderocol, launch of Branded India business, and limited competition launches in the US are not currently factored into estimates but could contribute significantly, offering the possibility of multiples of current EBITDA, it added.

Estimates

The brokerage predicts Sales, EBITDA, and PAT CAGR for FY23-26E at 24 percent, 38 percent, and 49 percent, respectively.

Valuation

As per the brokerage, for listed API players the trading range is wide, with stocks trading 16-46x 1-year fwd P/E. API players with a focus also on CDMO – the likes of Divi’s, Laurus, and Concord – trade at >30x Mar’25 P/E while the other set of players trade at sub-20x.

“ORCD is a high-growth business with multiple optionalities in play that have the potential to drive significant longer-term growth. Due to its smaller size/scale and business mix (skewed to RoW), we believe it should trade at a discount to its more evolved players (Divis / Laurus / Concord). Given multiple optionalities (including one NCE) and a high growth phase, we argue it should trade at a premium to its other peers (Glenmark Life/Supriya /Aarti). Our target P/E for ORCD is 20x on a 1-year forward basis for the base business (ex-PLI, optionality), which is a 25 percent discount to a median of its peers and a 45 percent discount to its more evolved players. This implies a 50 percent discount to Divis/Laurus/Concord on EV/ EBITDA basis (1-yr forward) and a 25 percent premium to the median,” it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 11 Dec 2023, 05:40 PM IST