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Wockhardt: Europe led 2004

Feb 10, 2005

Performance Summary
Domestic pharma company, Wockhardt, recently declared its December quarter as well as full year numbers. In 4QCY04, the company's consolidated revenues clocked a buoyant 21% growth led by strong performance in Europe and rest of the world. Its bottomline growth was equally buoyant at 26% YoY. The company ended the full year with over 31% revenue and nearly 50% bottomline growth.

(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
Net sales 2,838 3,438 21.1% 9,420 12,389 31.5%
Expenditure 2,242 2,697 20.3% 7,626 9,577 25.6%
Operating profit (EBDITA) 596 741 24.3% 1,794 2,812 56.7%
Operating profit margin (%) 21.0% 21.6%   19.0% 22.7%  
Other income 65 152 133.8% 74 158 113.5%
Interest (27) (119) - 4 (17) -
Depreciation 83 99 19.3% 267 368 37.8%
Profit before tax 605 913 50.9% 1,597 2,619 64.0%
Extraordinary expenditure - (113) - - (113) -
Tax 102 168 64.7% 171 371 117.0%
Profit after tax/(loss) 503 632 25.6% 1,426 2,135 49.7%
Net profit margin (%) 17.7% 18.4%   15.1% 17.2%  
No. of shares (m) 72.6 109.0   72.6 109.0  
Diluted earnings per share (Rs)*       13.1 19.6  
P/E ratio (x)         19.2  
(* annualised)            

What’s the company’s business?
Wockhardt is one of the leading domestic pharma companies with strong presence in the lifestyle segment and growing focus on biotechnology. The company, a few years back, was focused on the domestic market, but intense price competition and price regulations resulted in the company gradually shifting its focus to exports. Consequently, Wockhardt acquired two UK-based companies Wallis Laboratories and CP Pharma. The company now derives 60% of its revenues from non-India regions. The company has proven its R&D capabilities by indigenously developing and launching Biovac-B (hepatitis - B) vaccine, Wepox (Erythropotein) and Wosulin (human insulin).

What has driven performance in CY04?
Europe potion: Though European growth has slowed down post the acquisition spurt, the region still clocked a healthy 29% revenue growth. Just to put things in perspective, the revenues from European business in June quarter last year were Rs 333 m, while the revenues in September quarter 2003 significantly increased to over Rs 1 bn, led by the acquisition of CP Pharma. For the full year, the region grew by a significant 77% YoY and now forms 42% of Wockhardt’s revenues. In May 2004, Wockhardt acquired ‘esparma GmbH’ to give its German plans a fillip. Incidentally, Germany is the largest branded generics market in Europe.

US – The emerging driver: Going forward, the company's growth is likely to gain momentum in the US, where it launched 3 new products under the Wockhardt banner during third quarter of 2004. While the US market grew by a staid 3% in September quarter, in December quarter it displayed signs of picking up pace with nearly 10% revenue growth. US accounted for 8.3% of consolidated CY04 revenues. The region’s share in the pie is likely to go up over the next couple of years.

Home score: The sales in the domestic market were up 10% during the quarter and over 13% in CY04. The field force re-structuring in the domestic market, as well as buoyancy in the lifestyle segment (biotechnology, Nephrology, Diabetology) has helped company beat the industry growth rate. The 30 power brands of the company, which constitute 80% of the domestic revenue, grew by 15% in CY04. Also, the revenues from its biotech portfolio grew by 81% YoY during CY04. Wepox (Erythropoeitin) is growing at 47% plus and Wosulin, which has completed one year of its launch, increased its market share to about 6%-7% in domestic insulin market.

Geographical Mix…
(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
India 1,057 1,164 10.1% 4,342 4,916 13.2%
Europe 1,219 1,574 29.1% 2,938 5,206 77.2%
US 304 334 9.9% 1,077 1,033 -4.1%
Rest of World 259 365 40.9% 1,064 1,233 15.9%
Total 2,839 3,437 21.1% 9,421 12,388 31.5%

Margin story: The operating profit grew faster than the revenues. The basic reason for this is the increased contribution from the European markets, where margins are higher, as also the benefits of restructuring. Increased contribution from the high margin formulations business has also expanded operating margins. However, this margin profile is likely to be affected once competition picks up in the European markets. Also, company's recent entry into the US market on its own will affect the margins, as the cost of establishing sales and marketing network will take its toll, atleast in the near term.

Business Mix…
(Rs m) 4QCY03 4QCY04 Change CY03 CY04 Change
Formulations 2,439 2,956 21.2% 7,778 10,616 36.5%
Bulk Drug 400 482 20.5% 1,643 1,772 7.9%
Total 2,839 3,438 21.1% 9,421 12,388 31.5%

Tax provision and extraordinary expenses: Net profit grew by 26% in the quarter and by 50% in CY04. The company has recently issued FCCB's (Foreign currency convertible bonds) worth US$ 110 m. The interest charges are likely to increase owing to increased borrowings for funding acquisitions. Moreover, as the company’s contribution from the European operations pick up, the tax outgo could increase, as effective taxes are higher in those countries. The extraordinary expense of Rs 113 m in 4QCY04 as well as CY04 pertains to restructuring expenses in UK, as well as cost of setting up the US office.

Over the last few quarters…

The company has achieved robust growth on the back of its inorganic strategy over the past few quarters. Apart from this, changing geographical mix and streamlining of operations has helped Wockhardt to maintain healthy margins over the last few quarters.

What to expect?
At Rs 376, the stock is trading at 19 times CY04 earnings. Wockhardt, despite its past strong presence in the domestic market, has failed to capitalise on the same over the years. But with its recent focus on the international markets and some prudent acquisitions in Europe, growth prospects look promising. The company has achieved significant topline and bottomline growth in CY04, basically on the back of inorganic growth and restructuring moves. Further benefits of the restructuring are likely to filter in during 2005. The business strategy looks viable. We will update our report on the company soon.

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