Orchid's continuing struggle against a tide of debt

The company has initiated process through SBI; seeking to restructure around $300 mn

Orchid Chemicals and Pharmaceuticals Ltd, which has a debt of $500 million (Rs 2,980 crore today), was referred to the corporate debt restructuring (CDR) cell of the Reserve Bank of India late last month after liquidity constraints hit the city-based company’s operations.

The company has initiated the process through State Bank of India, the country’s largest lender, and is seeking to restructure around $300 million. Under CDR, banks typically increase the repayment period of loans to stressed borrowers, offer a moratorium and reduce lending rates. Orchid, which has attributed the liquidity constraints to lack of working capital and a delay in executing a $200-million deal with Hospira Inc, says it is hopeful things will change by the next quarter.

In August 2012, Orchid had agreed to sell its active pharmaceutical ingredients (API) business and a research and development (R&D) facility to US-based Hospira for $200 million. However, the deal was delayed as IDBI Bank moved the Madras High Court saying the company should first settle its dispute before the sale went through. The company repaid foreign currency convertible bonds (FCCB) worth around $167 million, which has resulted in a working capital crunch, says Ch Ram, head of corporate communications and investor relations. The delay in concluding the Hospira deal has further affected the company’s operations, he adds.

Orchid’s per-quarter interest outgo towards borrowings from around 20 lenders is at around Rs 70 crore, says Ram. This had an impact on the regular working capital requirements, leading to a poorer performance. According to the company’s annual report for 2011-12, its lenders include ICICI Bank, Central Bank of India, Union Bank of India, Canara Bank and Axis Bank.

The company reported a 45 per cent drop in revenue in the March quarter at Rs 268 crore from Rs 491 crore a year ago. “To produce, we need money, though the company has orders in hand for the next six-eight months,” says Ram.

Adds Sarabjit Kour Nangra, vice-president, research, pharmaceutical, at Angel Broking: “They (Orchid) were experiencing working-capital issues for quite some time and that’s why this CDR is announced. This will save them in the short term. But in the long term, they have to come up with definite plans.”

CARE Ratings revised Orchid’s ratings to D in December 2012 from B, following the delay in debt servicing and “poor performance” in FY12 and the first half of FY13. The short-term bank facilities were also revised from A4 to D.

Aggressive growth
Started in 1992 with an investment of around Rs 12 crore, Orchid soon became the country’s largest producer of oral and sterile cephalosporins (an antibiotic used for prevention and treatment of various bacterial infection). It started manufacturing generic injectables as well, which again requires high-standard equipment and high-quality manufacturing practices. “They had some good products and in order to take those products to regulated markets, they needed huge investment. They had to borrow to fund the projects,” says an industry analyst, who did not want to be named.

K Raghavendra Rao, chairman and managing director of Orchid, had said in an earlier interaction: “Yes, we made discrete investments in five categories — cephs, penems, penicillins, non-antibiotics and R&D. That too, the first four in API and dosage forms separately.” This led the company to have nine plants and the investments required to set up these plans increased Orchid’s debt burden.

When cash flow dried up, Orchid had to raise funds from various sources to set up facilities and invest in R&D, said an analyst. The company raised $42.5 million through FCCBs in November 2005, which were listed on the Luxembourg Stock Exchange and due in 2010. FCCBs worth $175 million were issued at face value in February 2007, which were listed on the Singapore Exchange. The proceeds of the bonds were mostly used for repaying debt. It also helped it complete the setting up of some facilities.

In February 2012, when $167 million worth of FCCBs were due, the company had to borrow again. “Originally, the payback was supposed to happen through fund-raising by diluting a stake via the qualified institutional placement (QIP) route. But the market condition was not good, so we could not go ahead with the plan,” says Ram.

Of the total $167 million, around $90 million was funded through external commercial borrowings from a consortium of Indian banks and the balance was funded through internal accrual and cash in hand, he adds. While the debt burden was increasing, Orchid announced its first sale to Hospira Healthcare India, a subsidiary of Hospira Inc. It sold its generic injectables business for $400 million in December 2009.

The company continued to invest heavily in capacity building even after the 2009 Hospira deal. Speaking on this, Rao earlier said the company had identified huge potential in some of the segments and had to invest further to build capacity to cash in on the opportunity.

After the first Hospira deal, Orchid’s debt had come down to Rs 1,600 crore from around Rs 3,000 crore. But the debt went up again as the company continued its capacity expansion drive. In October 2012, Rao said the debt was a little over Rs 2,100 crore. It was against this backdrop in the end of August 2012 Orchid announced plans to sell its penicillin and penem API business and the API facility in Aurangabad, Maharashtra, along with an associated R&D facility in Chennai to Hospira for $200 million.

Way forward
With the company having secured all no-objection certificates (NOCs) from lenders for the deal, the sales can now be concluded. A major share of the deal amount would be used to clear debt, says Ram.

Rao said the company was hopeful that in the next two months, it could come to a deal with banks on restructuring the debt.  Orchid is now planning to enter new high-margin, low-volume therapeutic verticals. It also has products in the R&D stage. In December, it received the initial milestone payment of $1.5 million from Merck and Co Inc on completion of a pre-clinical milestone in its anti-infectives research collaboration with the company’s Indian subsidiary. However, the new business would require more investment. In this situation, how the company could raise funds is unknown, especially when some of the promoters’ stake has been pledged, says another industry analyst, who also declined to be named.

If things go by the plan, Orchid would report a 20 per cent growth over the next three years from the 2011-12 level, a company senior said on condition of anonymity. The company reported Rs 103 crore profit after tax on Rs 1,792-crore sales in 2011-12.