Orchid Chemicals has had a very exciting 2008.
First in January the big crash took Orchid Chem with it, from the highs of 320+ down to the 240 levels. After hanging around there for a couple months, with some drama in the middle – a 20% drop in Feb 2009 included, the stock tanked 40% in a single day on March 17th, 2008.
Turned out the Bear Stearns fiasco had taken Orchid Chem with it – Bear owned a significant chunk of shares which were offloaded at “whatever they get us” prices. Which also resulted in the promoters selling off 7% of their stakes, because of margin calls.
Promoters and margin calls? Something shady, one thinks? It’s not quite that, as it seems the promoters held very little of Orchid anyhow. K.Raghavendra Rao, the big boy of the episode, and the promoter group held only 14% – to throw out any unwanted hostile takeovers, Rao bought 7 more percent and pledged the shares with Religare and Indiabulls. The pledged shares are checked for price everyday – and if they fall below a certain value the promoters needed to come up with more “margin” money to cover the loss. The Bear Stearns sale took the price below the threshold and Rao couldn’t come up with the margins – so the brokerages sold the shares. Rao now owes other institutions 65 crores, and is repenting for his act.
So the share fell further, down to 106 levels a few days later. This is when it looked extremely attractive to me – heck, trailing 4 quarter EPS is 29 bucks! At a P/E of 4 and a growth rate of well above 30% a year, this looked good. But you never catch a falling knife, so strength would decide the fate.
Since then the share has had a mighty recovery. In just a few days the stock closed in on 160, and then zoomed up to 240 levels. The funda: Solrex Pharma, supposedly a Ranbaxy promoter company, picked up a huge stake in the company. The stock went up to 245, and then retreated a little when Ranbaxy flatly denied a hostile takeover attempt.
But in two days, in which a lot of speculators would have gone bankrupt from the abrupt moves, the stock was back at 245 or so – with Solrex acquiring nearly 15% of Orchid. Any more would trigger an open offer for Orchid, for another 20%.
Now how does this pan out?
Problems: What if there is derivatives exposure? I don’t know. They will have some forex losses this quarter from the FCCB, as the dollar has appreciated against the rupee this quarter. I just hope they haven’t speculated on the forex, and they have denied it. Rao may be troubled, but I don’t believe he’s dishonest.
Okay big time disclosure: I am long on this stock. I still hold as there is a lot of upside potentially.
What’s my target? 350 is reasonable, and this is a momentum story so the time frame is three months or less. There is a good margin of safety.
On the lighter side, I hope this doesn’t turn out like this kind of Orchid.