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Wockhardt: Good performance

Feb 20, 2013

Wockhardt has announced its 3QFY13 results. The company has reported 26% YoY growth in sales and a 112% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 26% YoY during the quarter led by growth in both its international and domestic businesses.
  • Operating margins improved by 6.4% to 38% in 3QFY13 leading to a 51% YoY growth in operating profits.
  • Bottomline increases by 112% YoY during 3QFY13 despite the surge in tax expenses on account of reduction in interest costs.

Financial performance: A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 11,410 14,350 25.8% 31,740 41,240 29.9%
Expenditure 7,800 8,900 14.1% 22,130 25,790 16.5%
Operating profit (EBDITA) 3,610 5,450 51.0% 9,610 15,450 60.8%
EBDITA margin (%) 31.6% 38.0%   30.3% 37.5%  
Other income (210) (60)   (590) 380  
Interest (net) 680 360 -47.1% 1,660 1,250 -24.7%
Depreciation 260 300 15.4% 880 890 1.1%
Profit before tax 2,460 4,730 92.3% 6,480 13,690 111.3%
Exceptional (loss) (100) 100   (780) 420  
Tax 340 550 61.8% 690 1,650 139.1%
Profit after tax/(loss) 2,020 4,280 111.9% 5,010 12,460 148.7%
Net profit margin (%) 17.7% 29.8%   15.8% 30.2%  
No. of shares (m)         108.0  
Diluted earnings per share (Rs)         98.0  
Price to earnings ratio (x)*         18.0  
*based on trailing 12 months earnings

What has driven the performance in 3QFY13?
  • Topline grew by 26% YoY during the quarter led by growth in both its international and domestic business.

    Revenue break-up
    (Rs m) 3QFY12 3QFY13 Change
    USA 5,310 7,710 45.2%
    India 2,105 2,400 14.0%
    EU 3,290 3,400 3.3%
    -France 540 270 -50.0%
    -UK 200 238 19.0%
    -Ireland 48 49 2.1%
    RoW 705 840 19.2%
    Total 11,410 14,350 25.8%

  • US witnessed healthy growth of 26% YoY in constant currency terms and 45% YoY in Rupee terms in 3QFY13. Currently, the US contributes 54% to Wockhardt's total business against 31% and 44% in FY11 and FY12 respectively. The higher contribution is due to the launch of Toprol XL (metropolol succinate) and Para IV launches having low competition. Toprol, however, remains the key product for the company, contributing 13% to total revenues. Currently, the company has a market share of around 15% in this product despite the entry of Dr Reddy's drug in the market. However, lately some price erosion has been witnessed in this product. Other products like Comtan and Stalevo, which have low competition, also contributed to overall growth. Flonase, a respiratory product, is one more important driver for the company's growth. Wockhardt continues to focus on making niche launches and is filing its products on similar lines. Currently, the company has 34 ANDAs awaiting approval and it intends to file 30 more products in the next two years. Among these filings, around 50% will be low competition products and thus margin lucrative. We believe these two products to contribute US$ 30 m during their exclusivity. The company has 30 pending ANDAs and has guided for 15 new filings in the current fiscal.

  • During the quarter, EU, excluding France, witnessed growth of 14% YoY. Revenues from France declined by 50% YoY. While sales from the UK grew by 19% YoY, in constant currency terms growth was at 4% YoY. In the long run, the company expects EU to witness double digit growth on back of new launches. For 9mFY13, the company has made 8 new launches in the UK. The Ireland geography grew marginally by 3% YoY, and witnessed flat growth in constant currency terms. On the back of ongoing depression in Ireland, the company is finding it tough to grow in the market. However, it has been successful in retaining market share in this geography. Further, it is pertinent to note that ~65% of Ireland revenues is generated from exports, which are expected to grow in long run.

  • India business (excluding Nutrition business) grew at a low rate of 14%. The company witnessed improvement in its domestic business and expects to continue with a similar run rate in the upcoming period. The company has witnessed good traction in its pain, diabetes, CVS, Cough and Cold segments.

  • RoW markets, excluding India, grew by 19% YoY during 3QFY13.

  • Operating margins improved dramatically by 6.4% to 38% for the quarter. This led to the 51% YoY increase in the operating profits. Wockhardt has changed its policy pertaining to product development costs. Adjusting for these expenses in 2QFY13, EBITDA margins have improved by 8.6%.

  • Bottomline increased by 112% YoY during 3QFY13 despite the surge in tax expenses on account of reduction in interest costs.

What to expect?
At the current price of Rs 1,800, the stock is trading at a price to earnings multiple of 12 times our estimated FY15 earnings. The company will be exiting from the CDR plan in the next few weeks, as it has been able to meet its obligations ahead of time and will become net cash company in FY14. The company's balance sheet has improved drastically and its business has also been generating healthy margins. Wockhardt expects to maintain EBITDA margins atleast at 33% in the upcoming period. Further, it has kept its hedging position open which is partially helping the company take advantage of the depreciating domestic currency. In light of the performance for 9mFY13, we have revised our estimates. Wockhardt intends to continue focusing on niche segments and accordingly spend on R&D. Having said that, we would await more clarity on the products the company intends to make. Overall we maintain HOLD rating on the stock.

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