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4.1.10
3.1.10
Orchid Chemicals & Pharmaceuticals: Sell
Given the inherent risks associated with first-to-file opportunities and drug application approvals, investors may be better off taking fresh exposure later.
The company has sold its core antibiotic injectables business to Hospira Inc.
Srividhya Sivakumar
Shareholders can consider paring their exposure to the stock of Orchid Chemicals & Pharmaceuticals, which recently sold its antibiotic injectables business to the US-based Hospira Inc for $400 million (about Rs 1,870 crore).
Even though the deal valuations are attractive and would more than address Orchid's debt problems , it threatens to render the company's overall growth prospects unappealing. The generic injectables business enjoyed high-growth and high-margins and was the company's growth driver.
With the growth engine wedged out from its portfolio, Orchid's business would now primarily straddle across its low-margin API and oral dosage formulation businesses only. This is likely to reduce both revenues and margins, even as the company would enjoy significant savings on its interest outgo and depreciation charges.
At the current market price of Rs 184, the stock trades at about 14 times its likely FY-11 per share earnings. While this is at a discount to most peers, much of the premium that the company had earlier commanded was due to its presence in the niche antibiotic injectables area. With that gone, discounted valuations may be here to stay.
Parting with growth engine
As per the deal agreement, Orchid will transfer seven products (including two products in pipeline) in cephalosporins vertical and two products (including one in pipeline) in the penicillins vertical. It will also transfer its carbapenem line with key products such as meropenem and imipenem (with an estimated $1 billion market opportunity per product). In addition to the drugs, Orchid will transfer the manufacturing facilities of cephalosporin, penicillin, carbapenem and a R&D facility too. What's more, the sale also includes Orchid's key business of Tazo-Pip, for which it had acquired six-month exclusivity in September this year. Fortunately for it, the end of exclusivity for Tazo-Pip coincides with the transfer of business to Hospira.
This means by March 2010, when the businesses would effectively be transferred to Hospira, Orchid may have extracted peak sales from the Tazo-Pip opportunity.
On the whole, however, the company appears to have parted with its growth engine, for had it held on, it would have benefitted significantly from the opening up of business opportunities in carbapenem, where a handful of products were expected to go off-patent in the next couple of years.
Given the limited competition in these niche businesses and Orchid's low-risk and low-cost strategy of launching drugs with overseas partners, the divestment is certain to slice away a chunk of its future revenues.
The silver lining, however, comes from the 10-year agreement that Orchid has struck with Hospira.
As per the agreement, Orchid will supply active pharmaceutical ingredients (APIs) or bulk drugs required for producing the injectables. Not only will this help Orchid utilise its manufacturing capacities, export APIs that these would be, it may also help the company realise better margins. In addition to this, though it still may be early days, export API deals could also open up significant custom manufacturing opportunities for Orchid in the long run.
Deal money to help retire debt
On the valuations front, however, the company appears to have made the best of the deal. The antibiotic injectable business, which was expected to make up over $90 million in revenues this year, has been valued roughly at over four times, at $400 million.
For a company that was grappling with a debt of over Rs 2500 crore, including foreign currency convertible bonds worth $150 million redeemable in 2012, the deal money would provide the much-needed breath of fresh air, needed to sustain operations. The company had provided about Rs 109 crore as interest cost in the first half of the current year (about 18 per cent of its revenues) and Rs 76 crore as depreciation.
The influx of the deal money would help the company retire a chunk of its debt and improve cash positions. Orchid plans to retire its entire long-term debt of Rs 1200 crore and part of working-capital loan of Rs 550 crore. By doing this, the management expects to save around $40 million in interest cost alone.
And since the sale also involves transfer of assets (estimated fall in gross block of fixed assets at about Rs 600 crore and net block Rs 450 crore), it will help bring down depreciation charges too. Orchid expects the saving in interest cost and depreciation to help improve it's per share earnings by about Rs 7-8 next year.
Revenue concerns
Even though Orchid is likely to enjoy significant savings on the cost front, these near-term benefits are unlikely to supersede the lack of visibility on its revenue front. Post-deal, the management expects the company's revenues to be lower by $90 million and it's EBITDA to fall by over $30-40 million in FY11.
Operating margin too, as a result, is also likely to come under pressure as the share of the high-margin formulation business expected to go down from the likely 65 per cent level in FY10 to about 45 per cent in FY11. The management, however, is hopeful of improving the share of formulations to 50 per cent by FY-12. It expects the non-antibiotics segment to give it the next growth impetus, having filed 21 ANDAs with the USFDA.
Of those, seven are Para IV FTF (first-to-file) products, including the two FTFs that were recently settled with the US-based Schering-Plough. While the prospects do appear promising in the long run, given the inherent uncertainty and risks associated with FTF opportunities and drug application approvals, investors may be better off taking fresh exposure to the stock when such opportunities present themselves rather than remaining invested and wait them out.
1.11.09
key ratios while buying stocks
LOOKING to buy stocks but you are not sure how to select them? Don't fret. We have, here, eight ratios that would make your life easier, and of course, enable you to make the best possible stock selection.
1. Ploughback or Reserves
Every year, the company divides its net profit (profits in hand after subtracting various expenses including taxes) in two portions: ploughback and dividends.
While dividends are handed out to the shareholders, ploughback is kept by the company for its future use and is included in its reserves. Ploughback is essential because, besides boosting the company’s reserves, it is a source of funds for the company’s expansion plans. Hence, if you are looking for a company with good growth prospects, check its ploughback figures. Reserves are also known as shareholders’ funds, since they belong to the shareholders. If a company’s reserves are twice its equity capital, the company can reward its shareholders with a generous bonus. Also any increase in reserves will push the share price of your share.
2. Book value per share
This ratio shows the worth of each share of a company as per the company's accounting books. It is calculated as:
Shareholders' funds
------------------------------------------------ = Book Value per share
Total quantity of equity shares issued
Shareholders' funds can be computed as such:
Total assets (equity capital to the company's reserves) less total liabilities (money owed to creditors).
Book value is an old record that uses the original purchase prices of the assets.
However, it doesn't show the present market price of the company’s assets. As a result, this ratio has a restricted use when it comes to estimating the market price of the shares, but can give you an estimate of the minimum price of the company’s shares. It will also help you judge if the share price is overpriced or under-priced.
3. Earnings per share (EPS)
One of the most popular investment ratios, it can be computed as:
Profit Post Tax
------------------------------------------------ = EPS
Total quantity of equity shares issued
This ratio computes the company's earnings on a per share basis. Say, you own 100 shares of ABC Co., each having a face value of Rs 10. Assume the earnings per share is Rs 10 and the dividend declared is 30 per cent, or Rs 3 per share. This implies that on every share of ABC Co., you earn Rs 6 each year, but you actually get Rs 3 via dividend. The balance of Rs 4 per share goes into the ploughback (retained earnings). Had you purchased these shares at par, it implies a return of 60 per cent.
This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look at earnings per share, as it is the actual indicator of the returns earned by your shares.
4. Price Earnings Ratio (P/E)
This ratio highlights the connection between the market price of a share and its EPS.
Price of the share
------------------------ = P/E
Earnings per share
It shows the degree to which earnings of a share are protected by its price. Say, the P/E is 40, it means the share price is 40 times its earnings. So if the company's EPS is constant, it will need about 40 years to make up for the purchase price of the share, after taking into account the dividends and the capital appreciation. Hence, low P/E means you will recover your money quickly.
P/E ratio shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company. If the current P/E ratio is low, as against the future prospects of a company, then the shares make an attractive investment option. But if the company is saddled with losses and falling sales, stay away from it, despite the low P/E ratio.
5. Dividend and yield
Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don’t have much of growth to talk about. This is because the ploughback required to finance future development is insufficient. Similarly, those companies in high growth sector don’t give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends.
So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares. Yield (dividend yield) can be calculated as:
Dividend per share
----------------------------- x 100 = Yield
Market price of a share
Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.
6. Return of capital employed (ROCE)
ROCE is the ratio that is calculated as:
Operating profit
----------------------------------------
Capital employed (net value + debt)
To get operating profit, add old taxes paid, depreciation, special one-off expenses, and special one-off income and miscellaneous income to get the net profit. The operating profit is a far better indicator of the profits earned by the company instead of the net profit. Hence this ratio is the better indicator of the general performance of the company and the company’s operational efficiency. It is one of the most useful ratio that lets you compare amongst the companies.
7. Return on net worth (RONW)
RONW is calculated as
Net Profit
-----------------
Net Worth
This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company’s business operations, RONW lets you gauge the returns you can earn on your investment. When used along with ROCE, you get an overview of the company’s competence, financial standing and its capacity to generate returns on shareholders’ finances and capital employed.
8. PEG ratio
PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced. To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company’s shares. Vice versa also holds true.
P/E
----------------------------------
Expected growth rate of the EPS of the company
In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell.
These are some of the most critical ratios that must be considered when purchasing a share. Extensive reading of the financial performance of the company in newspapers and magazines will help you get all the relevant information to arrive at the correct decision.
1. Ploughback or Reserves
Every year, the company divides its net profit (profits in hand after subtracting various expenses including taxes) in two portions: ploughback and dividends.
While dividends are handed out to the shareholders, ploughback is kept by the company for its future use and is included in its reserves. Ploughback is essential because, besides boosting the company’s reserves, it is a source of funds for the company’s expansion plans. Hence, if you are looking for a company with good growth prospects, check its ploughback figures. Reserves are also known as shareholders’ funds, since they belong to the shareholders. If a company’s reserves are twice its equity capital, the company can reward its shareholders with a generous bonus. Also any increase in reserves will push the share price of your share.
2. Book value per share
This ratio shows the worth of each share of a company as per the company's accounting books. It is calculated as:
Shareholders' funds
------------------------------------------------ = Book Value per share
Total quantity of equity shares issued
Shareholders' funds can be computed as such:
Total assets (equity capital to the company's reserves) less total liabilities (money owed to creditors).
Book value is an old record that uses the original purchase prices of the assets.
However, it doesn't show the present market price of the company’s assets. As a result, this ratio has a restricted use when it comes to estimating the market price of the shares, but can give you an estimate of the minimum price of the company’s shares. It will also help you judge if the share price is overpriced or under-priced.
3. Earnings per share (EPS)
One of the most popular investment ratios, it can be computed as:
Profit Post Tax
------------------------------------------------ = EPS
Total quantity of equity shares issued
This ratio computes the company's earnings on a per share basis. Say, you own 100 shares of ABC Co., each having a face value of Rs 10. Assume the earnings per share is Rs 10 and the dividend declared is 30 per cent, or Rs 3 per share. This implies that on every share of ABC Co., you earn Rs 6 each year, but you actually get Rs 3 via dividend. The balance of Rs 4 per share goes into the ploughback (retained earnings). Had you purchased these shares at par, it implies a return of 60 per cent.
This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look at earnings per share, as it is the actual indicator of the returns earned by your shares.
4. Price Earnings Ratio (P/E)
This ratio highlights the connection between the market price of a share and its EPS.
Price of the share
------------------------ = P/E
Earnings per share
It shows the degree to which earnings of a share are protected by its price. Say, the P/E is 40, it means the share price is 40 times its earnings. So if the company's EPS is constant, it will need about 40 years to make up for the purchase price of the share, after taking into account the dividends and the capital appreciation. Hence, low P/E means you will recover your money quickly.
P/E ratio shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company. If the current P/E ratio is low, as against the future prospects of a company, then the shares make an attractive investment option. But if the company is saddled with losses and falling sales, stay away from it, despite the low P/E ratio.
5. Dividend and yield
Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don’t have much of growth to talk about. This is because the ploughback required to finance future development is insufficient. Similarly, those companies in high growth sector don’t give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends.
So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares. Yield (dividend yield) can be calculated as:
Dividend per share
----------------------------- x 100 = Yield
Market price of a share
Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.
6. Return of capital employed (ROCE)
ROCE is the ratio that is calculated as:
Operating profit
----------------------------------------
Capital employed (net value + debt)
To get operating profit, add old taxes paid, depreciation, special one-off expenses, and special one-off income and miscellaneous income to get the net profit. The operating profit is a far better indicator of the profits earned by the company instead of the net profit. Hence this ratio is the better indicator of the general performance of the company and the company’s operational efficiency. It is one of the most useful ratio that lets you compare amongst the companies.
7. Return on net worth (RONW)
RONW is calculated as
Net Profit
-----------------
Net Worth
This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company’s business operations, RONW lets you gauge the returns you can earn on your investment. When used along with ROCE, you get an overview of the company’s competence, financial standing and its capacity to generate returns on shareholders’ finances and capital employed.
8. PEG ratio
PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced. To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company’s shares. Vice versa also holds true.
P/E
----------------------------------
Expected growth rate of the EPS of the company
In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell.
These are some of the most critical ratios that must be considered when purchasing a share. Extensive reading of the financial performance of the company in newspapers and magazines will help you get all the relevant information to arrive at the correct decision.
11.8.09
26 mutual funds waiting in the wings
Mumbai, Aug. 10 As many as 26 applications for setting up mutual funds arepending with the Securities and Exchange Board of India (SEBI) at various stages of approval. There are already 36 fund houses actively soliciting investments for over 2,000 schemes.
Room for more
Though retail investors have trouble selecting an MF scheme from among the thousands on offer, industry observers feel that there is headroom for many more to set up shop.
“In India, MF penetration is very low and the coverage in terms of the savings invested in mutual funds is also negligible,” said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.
With the top five MFs accounting for over 50 per cent of the total asset base, there is scope for more funds, said Mr Dhirendra Kumar, CEO of Value Research. The mutual fund industry manages an asset base of Rs 6,89,946 crore as on July end.
Those awaiting SEBI approval include IndiaBulls, India Infoline, Schroder Investment Management, Axis Bank, Sanlam Investment Management, ASK Investment Holdings Pvte Ltd, Karvy Stock Broking Ltd, Mahindra & Mahindra Financial Services, Union Bank a-KBC Asset Management and IDBI Bank.
Consolidation
With many more players foraying into the mutual fund space, some industry officials see scope for consolidation.
Some would even be coming in with a possible eye on for acquiring existing businesses, said Mr Kurian.
There might be consolidation in the future, with some marginal players wanting to exit and new and existing players taking over those businesses, said Mr Saurabh Nanavati, CEO of Religare Mutual Fund.
Room for more
Though retail investors have trouble selecting an MF scheme from among the thousands on offer, industry observers feel that there is headroom for many more to set up shop.
“In India, MF penetration is very low and the coverage in terms of the savings invested in mutual funds is also negligible,” said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.
With the top five MFs accounting for over 50 per cent of the total asset base, there is scope for more funds, said Mr Dhirendra Kumar, CEO of Value Research. The mutual fund industry manages an asset base of Rs 6,89,946 crore as on July end.
Those awaiting SEBI approval include IndiaBulls, India Infoline, Schroder Investment Management, Axis Bank, Sanlam Investment Management, ASK Investment Holdings Pvte Ltd, Karvy Stock Broking Ltd, Mahindra & Mahindra Financial Services, Union Bank a-KBC Asset Management and IDBI Bank.
Consolidation
With many more players foraying into the mutual fund space, some industry officials see scope for consolidation.
Some would even be coming in with a possible eye on for acquiring existing businesses, said Mr Kurian.
There might be consolidation in the future, with some marginal players wanting to exit and new and existing players taking over those businesses, said Mr Saurabh Nanavati, CEO of Religare Mutual Fund.
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