Ready for FCCB, Orchid Chem retains 20-25% growth guidance

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From Rs 186 at the beginning of November, Orchid Chemicals has been on a downtrend, falling nearly 5% till date on concerns about the upcoming foreign currency convertible bond (FCCB) issue. The bonds are up for redemption in February 2012.

Speaking to CNBC-TV18, K Raghavendra Rao, chairman and managing director of Orchid Chemicals says that the company has tied up funds for the repayment partly through external commercial borrowings (ECB) and rest through internal accruals.

The company retains its growth guidance of 20-25% for FY12. Rao says that the company is looking to replace higher interest cost bearing loans to stem interest cost hike going ahead. "Interest costs will not rise in FY13," he says.

Orchid is set to gain from supply of active pharmaceutical ingredients (API) to Hospira for their anti-bacterial drug, Imipenem. Rao expects a market share of 30-40% for Imipenem.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Could you explain the Primaxin plan in terms of how soon the launch will take place and how soon could you get revenues?

A: This is an important approval for Hospira and for Orchid. Orchid's active pharmaceutical ingredients (API) and our (abbreviated new drug application) ANDA which we transferred to Hospira received the approval.

This is the first generic to be approved in the world with a USD 140-150 million market share. There is no competition so we should do extremely well on this product. As soon as the approval came we launched the product, it should augur well for the second half of the current year as well as for the next year.

Q: What revenues do you expect from those API supply to Hospira and whether that would be enough to meet your guidance that you have set this year?

A: We will get it around Rs 2,200-2,300 crore, without any issues we should be able to meet the guidance. It's too early to put a number to this product. In next few weeks we will give an exact guidance on that but suffice to say that a decent market share of 30-40% is easy to gain.  We will translate to a number without much of a price defense, being the first generic we didn't have to drop the prices to get market entry.

It should do well and meet the guidance for the current year without any problem.

Q: The FCCB is due in February, a few months away. Earlier you had indicated that you are looking at tying up some debt to replace that FCCB. Tell us whether you have clinched a final restructuring?

A: Yes, the sanctions are already on the anvil and we will repay it with dollar loan and internal generations. We are not raising new bonds or equity and we are repaying it on time in February, with a combination of external commercial borrowing and internal accruals. Those plans are in place and there is no issue in terms of repayment of FCCBs.

Q: It has been completely tied up in the full size of the FCCB because you had to make some provision in this quarter. Will you not have to do that in the next quarter?

A  We need to restate the provision at the end of each quarter depending upon where the rupee is to dollar. But I have to clarify one thing that on dollar balance sheet, Orchid is mildly positive, taking into account the FCCBs or other foreign currency loans. If you do the calculations, from the USD 500 million of our sales, around USD 420-430 million is exports, and against that the import component, it is less than USD 200 million.

The delta of USD 200 million on profit and loss statement (P&L) is in terms of dollar inflow and my dollar outflow including FCCBs is less than USD 200 million. My dollar balance sheet is mildly positive hence rupee volatility is just a paper entry and it doesn't affect Orchid on six months or one year basis.

Having said that, depending upon the rate of exchange we need to make those entries by December. This is due on February 28th and we will repay that with a combination of ECBs and internal accruals.

Q: What are the chances that you could outdo the guidance that you have set out? The first half has not been strong. Do you expect to see better than 20-25% growth guidance

A: We will stick to our guidance of 20-25% growth because there are so many variables; just one product approval is not sufficient. It' an important product but in the context of the overall business there are so many ups and downs that keep happening. So we will stick to the guidance and we will achieve this 20-25% guidance and this approval will help in that process.

Q: By how much do you expect the interest cost to go up in the next fiscal year?

A: The interest cost in the next fiscal year will not go up because we are replacing a higher FCCB with lower amount of ECB. We will fund balance through internal accruals in terms of repayment and we are moving towards rejig of our financial portfolios in a way that we will bear less interest cost loans. There is going to be internal generation and free cash flows next year which will go to repay some amount of debt.

Interest cost will be almost the same next year, they are definitely not going to go up.