Stock Market Result Update on Orchid Chemicals for 1QFY2012

Stock Market Result Update on Orchid Chemicals for 1QFY2012 with a Buy recommendation and a Target Price of `373 (12 months).

Orchid Chemicals (Orchid) reported below-expectation numbers for 1QFY2012. Going forward for FY2012, management has guided 25% revenue growth to US$500mn, EBITDA margin at ~24% and EPS of `30 on current equity. The company plans to raise `1,000cr primarily to repay the FCCBs due in February 2012, and the balance amount to be used to repay debt and pursue organic and inorganic opportunities. We maintain our Buy view on the stock.

Weak set of numbers: For the quarter, on a consolidated level, Orchid reported net sales of `413cr (`337cr), up 22.5% yoy. The company’s gross margin expanded by 62bp yoy to 48.6%, while OPM dipped by 4.7% to 13%, much lower than expectation of 22.1%. The squeeze in operating profit was on  account of the substantial rise in other expenses, which rose by 50.4% during the quarter. Further, a high increase in the company’s interest expenses during the quarter led to a dip in net profit, which came in at `16.7cr vs. our expectation of `50cr.

Outlook and valuation: We expect Orchid to post net sales of `2,143cr, with EBITDA margin of 21.8% in FY2012E. The stock is currently trading at 9.9x FY2012E and 7.6x FY2013E earnings. We maintain our Buy rating on the stock with a revised target price of `373.