Solrex Pharma ups stake in Orchid Chem to 11.4%

Ranbaxy has been making moves on Orchid Chemicals. It has quietly picked up 11.4% stake in Orchid through Solrex Pharma a group company.

It has been a rollercoaster ride for Orchid Chemicals. In the last one month, Orchid has been a takeover target for the country's largest pharmaceutical group Ranbaxy.

In March, Orchid's promoters liquidated over 7% stake in the market due to margin calls that took the promoter stake down to just 17%. This made Orchid very vulnerable for a take-over. And that's when Solrex Pharmaceuticals, a Ranbaxy promoter group company, entered the scene.

It has been quietly consolidating its stake in Orchid since the last week of March. Solrex has, in the past week, acquired 8.06% in Orchid Chemicals through open market transactions. The accumulation by Solrex started when the stock of Orchid Chemicals ranged between Rs 161 and Rs 175.

The Orchid Chemicals management holding is down to 17% from the earlier 24% after the margin calls were triggered. Orchid has a USD 200 million FCCB issue, which could lead to 35% increase in fully diluted shares. The company’s business growth prospects look good and its balance sheet stretched. The total debt of the company is Rs 1573 crore in FY08 estimates. Its operating cash flow was negative in FY07. The debt to equity is at 2.6 times versus the industry average of 1.5 times.

Solrex has bought the first tranch of 8% at Rs 161-175, which is just about 10 times FY08 estimates and at seven7 times FY09 estimates. Yesterday's additional 3.3% stake at Rs 197 is 12-times FY08 estimates and 8 times FY09 estimates.

Just a month ago, the stock was at Rs 230 and traded at 15 times FY08 estimates and 10 times FY09 estimates. The acquisition has come at very cheap valuations to Solrex. The company is showing a strong presence in the US generic market, in cephalosporin space.

The closing price as on Monday was Rs 207.

Ranbaxy's senior management and promoters were not reachable for comments. Orchid said they have been intrigued at the stake consolidation.
It is not clear whether this stake in Orchid is just an investment by Ranbaxy's treasury or whether it will eventually want a majority stake, as it did in the case of Zenotech.

Market sources say Ranbaxy promoters may possibly pick up more stake in Orchid through Solrex and finally take it to around 15%. Whatever the speculation, it is certain that Orchid has swallowed the right pill to grab more attention.