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Wockhardt: ‘Formulating’ growth story! - Views on News from Equitymaster
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Wockhardt: ‘Formulating’ growth story!
Feb 14, 2006

Performance Summary
Growth in the international business, powered by the strong performances of both the US and ROW regions, has contributed to the pharma major, Wockhardt’s topline growth during fiscal 2005. Operating margins expanded during the year on the back of an increased focus on cost control and an improved business mix. All these factors put together led to a 20% YoY growth in the bottomline.

Consolidated numbers
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net sales 3,471 3,659 5.4% 12,516 14,121 12.8%
Expenditure 2,730 2,808 2.9% 9,704 10,835 11.7%
Operating profit (EBIDTA) 741 851 14.8% 2,812 3,286 16.9%
Operating profit margin (%) 21.3% 23.3%   22.5% 23.3%  
Other income 271 78 -71.2% 174 180 3.4%
Interest - -   - 95  
Depreciation 99 98 -1.0% 368 426 15.8%
Profit before tax 913 831 -9.0% 2,618 2,945 12.5%
Extraordinary item (113) -   (113) -  
Tax 169 101 -40.2% 370 374 1.1%
Profit after tax/ (loss) 631 730 15.7% 2,135 2,571 20.4%
Net profit margin (%) 18.2% 20.0%   17.1% 18.2%  
No. of shares (m) 109.0 109.2   109.0 109.2  
Diluted earnings per share (Rs)*         23.6  
P/E ratio (x)*         21.7  
(* on a trailing 12-month basis)            

What is the company’s business?
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (75% stake), is one of the leading domestic pharmaceutical companies with strong presence in the lifestyle segment and a growing focus on biotechnology. With acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY05, Wockhardt derived 63% of its revenues from non-India regions (60% in CY04). Wockhardt has a subsidiary in the UK, which holds 100% in CP Pharma and Wallis Laboratories. The company has acquired ‘Esparma GmbH’ in Germany and has set up presence in Brazil and the US. The company spent about 5% of consolidated revenues on R&D in CY05 and 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 CY05?
Biotech contributes to domestic growth: The formulation business in India recorded a strong 10% YoY growth, outperforming the industry growth rate of 8%. This growth was chiefly driven by Wockhardt’s biotech and diabetology portfolio. Biotech portfolio grew by 27% YoY, led by the company’s key brands like Wepox and Wosulin. Wosulin clocked an impressive 67% YoY growth during the year and cornered 40% market share of new prescriptions. Significant launches during the year included Biovac-A (Hepatitis A vaccine) and Wosulin pen and cartridges.

Geographical mix
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
India 1,164 1,355 16.4% 4,904 5,264 7.3%
Europe 1,574 1,608 2.2% 5,257 5,763 9.6%
US 334 272 -18.6% 1,073 1,498 39.6%
Rest of the world 365 422 15.6% 1,282 1,596 24.5%
Total 3,437 3,657 6.4% 12,516 14,121 12.8%

US and ROW shine: The US business grew 40% YoY to touch Rs 1.5 bn in revenue terms. This growth was driven by six new products launched during the year. During the year, the company filed 16 new ANDAs out of which 9 were for injectables. It received approvals for 3 ANDAs. At the end of 2005, the total number of ANDAs pending stood at 22. Also, the company gained market share for two of its key products ‘Bethanechol’ and ‘Enalapril’. The company expects the US market to drive growth in CY06 as well, led by new launches made late in 2005 and expected new approvals.

The Rest of the World (ROW) region grew by a strong 25% YoY during the year driven by its biotechnology business. In CY05, the company received 26 approvals in 18 countries and had over 55 registrations pending.

Business mix
  4QCY04 4QCY05 Change CY04 CY05 Change
Formulations 2,956 3,311 12.0% 10,685 12,467 16.7%
Bulk drugs 482 348 -27.8% 1,831 1,654 -9.7%
Total 3,438 3,659 6.4% 12,516 14,121 12.8%

The European picture: The European business grew by 10% YoY during the year despite severe pricing pressure, especially in the API business. The company made Day 1 launches in both the markets of UK and Germany in CY05. During the year, Wockhardt completed the integration of both Esparma and CP Pharma. Also, about 40% of manufacturing operations of Esparma (Germany) were transferred to the UK manufacturing site.

Bottomline and margin scenario: Operating margins expanded by 80 basis points during CY05, mainly owing to Wockhardt’s efforts towards cost control and improving business mix. The company’s focus on high-end biopharmaceuticals and niche value added portfolio has also contributed to the margin expansion. All these factors put together led to a 20% YoY rise in the bottomline. However, it must be noted that the company incurred an extraordinary expense of Rs 113 m in CY04 pertaining to restructuring expenses in UK, as well as cost of setting up the US office. If we exclude this effect, then the bottomline growth has been at 14% YoY.

Cost break-up
  4QCY04 4QCY05 CY04 CY05
(Increase)/decrease in stock -9.8% -10.6% -2.4% -2.3%
Raw material consumption 36.6% 34.1% 28.8% 28.2%
Purchase of finished goods 12.7% 13.1% 15.2% 15.0%
Staff cost 14.0% 14.5% 13.1% 13.2%
R&D expenditure 6.1% 4.4% 5.2% 4.8%
Other expenditure 19.1% 21.2% 17.5% 17.9%

Over the last few quarters: Wockhardt 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 the company maintain healthy margins.

Quarterly trend
(%) 3QCY04 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Sales growth (YoY) 11.3% 21.1% 6.5% 28.8% 12.0% 5.4%
Operating profit margin 25.2% 21.6% 19.3% 25.4% 24.3% 23.3%
Net profit growth (YoY) 13.6% 25.6% -6.1% 54.7% 16.5% 15.7%

What to expect?
At the current price of Rs 511, the stock is trading at a price to earnings multiple of 16.1 times our estimated CY07 earnings. Going forward, on the domestic business front, biotech and diabetology will continue to remain the key growth drivers for the company. Also, continued focus on its power brands will help the company sustain revenue growth. The international business, especially the US is expected to significantly drive growth and garner a larger share of the revenue pie. As far as the US markets are concerned, the company intends to focus on building capabilities to achieve critical mass.

We had recommended a ‘Buy’ on the stock in March 2005 at Rs 363, with a target price of Rs 510, which has been breached. We shall soon update our research report on the company.

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