See EBITDA margin at 23-24% in FY14: Orchid Chemicals

K Raghavendra Rao, chairman and managing director, Orchid Chemicals and Pharmaceuticals terms the company's Q3 results as an "abberation" and continues to be optimistic on the pharma firm's performance in the next quarter. The company posted extremely disappointing Q3 numbers. Its net loss was seven fold at Rs 72.4 crore versus a loss of Rs 10.1 crore (Y-o-Y).

"This is not a very representative quarter because we had cash flow issues in terms of working capital support ever since we rebate the bonds last year. So, the working has suffered quite a bit in terms of capacity utilisation, production and sale," he adds.

Taking about the deal with Hospira, Rao says, the company will conclude the process by next month and that should help numbers rationalise. Hospira will buy a factory and a research centre from Orchid for USD 200 million.

Rao is positive and expects an EBITDA margin of 23-24% in FY14 apart from a revenue rate of Rs 400 crore per quarter.

Below is the edited transcript of Rao's interview to CNBC-TV18.

Q: Your EBITDA has gone down to Rs 23 crore for the current quarter, margins have collapsed. What went wrong?

A: This is not a very representative quarter because we had cash flow issues in terms of working capital support ever since we rebate the bonds last year. So, the working has suffered quite a bit in terms of capacity utilisation, production and sale. The company has an ability to do atleast Rs 450-500 crore per quarter as a topline and with decent EBITDA margins. However, this quarter was an aberration, which should get rectified once the deal with Hospira is implemented next month and the new money comes in. It will pare down debt as well as pump in money for working capital to have a robust growth next year.

Q: When do you get around interest cost problem? Can you put some numbers to it because first nine months you have paid out Rs 220 crore of interest? Your bottomline cannot improve in this kind of a scenario. Next quarter onwards are we going to see firm improvement on that front?

A: We expect to conclude the deal with Hospira by next month latest and we will be getting in over Rs 1,000 crore. Most part of it will go to pare down debt and a couple of hundred crores will be pumped into working capital. So, I expect an interest cost reduction of atleast Rs 100 crore next year. With a run rate of about Rs 400 crore of topline next year, post divestment as well, we should be back in black handsomely from next quarter.

Q: Is it just a debt and interest cost problem though? Your revenues are down more than 30 percent and your margins have got hit in a context where your expenses have gone down about 15 percent this quarter?

A: As I said this particular quarter is not much representative due to the product mix in the markets that we operated in. If you take the overall nine month period also, the total sales are down by about 25 percent or so. This is not a normal year because ever since the Foreign Currency Convertible Bond (FCCB) repayment, we have been tight on cash flow. So, once this deal is done and new money comes in we will be pumping in at least Rs 200 crore in working capital, which will take the company to normal run rate of Rs 500 crore with the existing business but Rs 400 crore post divestment because what we are divesting is only 23 percent of our total business, which is what we do with Hospira and next year we plan to grow at least by the same percentage, which means next year I will come back to the same sales level of around Rs 1,800 crore but down by about Rs Rs 1,000 crore in debt and interest charge will be down by at least Rs 100 crore next year.

Q: Along with sales target, what kind of relief can you point to for the rest of this calendar year even in terms of your EBITDA level performance and your bottomline performance?

A: I think for 2013-14, we should have a run rate of Rs 400 crore per quarter post divestment topline. I expect the EBITDA to be around 23-24 percent and interest cost down by at least Rs 100 crore compared to current year numbers.

Q: Are you losing traction with your clients though because of working capital problems. One quarter you were not able to supply to them and in next quarter as working capital eases, you will probably in be a better position. Is that weakening your market position?

A: We have two types of businesses; one is the contractual business with large clients. We are able to keep that quiet a bit. The other part of the business is the spot business that we do in any active pharmaceutical ingredients (API) sales business in emerging markets. That is only a question of being able to supply and have the supply chain coming back into the system. So, the market even if it is not there right now, can be captured to a large extent. We are keeping the larger clients with us and that business is intact and the spot business is the one which we will ramp up once the working capital comes in.