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Interest cost on Merind takeover pulls down Wockhardt net - Views on News from Equitymaster
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  • Feb 29, 2000

    Interest cost on Merind takeover pulls down Wockhardt net

    Wockhardt has declared impressive operations results for the 18–month period ended December 1999. The company extended its year to 18 months primarily since it has changed its year ending from June to December as well as de–merged its non-pharmaceutical businesses into a separate company – Wockhardt Life Sciences. The current results include the performance of the non–pharma business too.

    (Rs m) Dec 1999
    (18 months)
    June 1998
    (12 months)
    Sales 8,625.0 4,035.0 113.8%
    Other Income 63.0 81.0 -22.2%
    Expenditure 7,067.0 3,252.0 117.3%
    Interest 260.0 - 0.0%
    Depreciation 246.0 128.0 92.2%
    Profit before Tax 1,099.0 736.0 49.3%
    Tax 43.0 28.0 53.6%
    Profit after Tax/(Loss) 1,056.0 708.0 49.2%
    Net profit margin (%) 12.2% 17.5%  

    Wockhardt was started in 1973 as a closely held company. The company went public in Dec 1992. It is ranked fifth by local sales in Indian pharma sector along with its 97% subsidiary, Merind. It also has subsidiaries in the UK and USA, which have a presence in generic markets.

    If one were to annualise the results the net sales have grown by 43% while the operating profits have gone up by 33%. As a focussed pharma company, in the future, growth rates for sales and PAT will improve further. This is because the de–merged company Wockhardt will have 80% of the profits and only 32% of the assets.

    The company has grown among the fastest among top 10 pharma companies and ranks fifth in ORG’s retail audit. It’s current product portfolio is strong and most of its brands are either market leaders or enjoy a dominant position. Its top 5 brands are expected to contribute only 29% of its sales. Almost 30% of its total pharma sales come from products launched over the last five years.

    The company gets only 12% of its revenues from products under Drug Price Control Order (DPCO). This low percentage is because new product and/or technology introductions are exempt from the DPCO category for the first five years. Over the last eighteen months too the company has introduced 33 products in the domestic market including Kefstar an oral cephalosporin and the Biovac–B, the Hepatitis B vaccine (in alliance with a German company).

    The company is focussing on the US based generic market and has already filed 4 Abbreviated New Drug Applications (for formulations) and 7 Drug Master Files (for bulk drugs). Each ANDA filing costs around half a million dollars. Besides, the company already has a tie up with Sidmak Labs USA in place. The introduction of ranitidine however seems like a move to test the US generic market rather than with any commercial intention in mind since the company was not the first to introduce the generic product in the US market.

    Wockhardt’s DPP (dexo-propoxy-phene) was revised upwards by 25% in Aug 99. The company ranks at number two in the manufacture of DPP worldwide. Besides, DPP is used for its key brand, Proxyvon, which accounts for more than Rs 500m sales in India. Thus the benefit of a corresponding price revision in the end product prices (Proxyvon) will further improve pharma profits in FY2000.

    Perhaps the only grey area is the higher interest charges. This is because the company borrowed funds while taking over Merind. While the business of Merind has been integrated the legal merger is still some time away. Thus while the cost of debt is reflected in Wockhardt’s books, the revenues and profits of Merind are not.

    Interest costs of Rs. 260 million along with extraordinary write off amounting to Rs.43 million (on account of bad debts accruing from the exports to Russia) have pulled down the net margins in the current year.

    Market View:
    Analysts have rated Wockhardt as a buy primarily due to the de–merger of the pharma business which will improve the profitability of the business since the pharma business has only 32% of the assets of the company but reports almost 80% of the net profit. Besides, the pharmaceutical business is itself an extremely strong business and is expected to do very well despite the introduction of product patents in 2005.



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