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Wockhardt: Stellar growth from US

Mar 30, 2012

Wockhardt has announced its third quarter results for 2011-12 (3QFY12). The company has reported 27.1% YoY and 50.1% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 27.1% YoY led by strong performance from the US and domestic business.
  • Operating margins (EBITDA) rise 550 bps (5.5%) to 31.1% due to a fall in other expenditure and staff costs.
  • Net profits grow 50.1% YoY due to a strong sales growth and margin expansion.

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 9,508 12,087 27.1% 28,125 33,724 19.9%
Expenditure 7,071 8,323 17.7% 21,688 23,618 8.9%
Operating profit (EBIDTA) 2,437 3,764 54.5% 6,437 10,106 57.0%
EBDITA margin (%) 25.6% 31.1%   22.9% 30.0%  
Other income 65 85 30.8% 136 167 22.8%
Depreciation 301 277 -8.0% 895 937 4.7%
Interest 561 679 21.0% 1,770 1,662 -6.1%
Profit before tax 1,640 2,893 76.4% 3,908 7,674 96.4%
Tax 173 371 114.5% 374 830 121.9%
Exceptional Gain / (Loss) 165 (97)   (4,011) (778)  
Forex (Gain) / Loss 223 295   228 762  
Minority Interest 8 (3)   (8) 39  
Profit after tax/(loss) 1,417 2,127 50.1% (713) 5,343  
Net profit margin (%) 14.9% 17.6%   -2.5% 15.8%  
No. of shares (m) 109 109   109 109  
Diluted earnings per share (Rs) 13 19   (7) 49  
Price to earnings ratio (x)*   9.7        
*On trailing 12 month basis

What has driven performance in 3QFY12?
  • Wockhardt's sales grew by 27.1% YoY for the quarter with growth coming from phenomenal increase in the US market. The strong growth was backed by robust sales from a drug named Generic Toprol XL where the company's market share has improved to 19%. The weakening of rupee against the dollar also helped in achieving higher than average sales. Wockhardt USA crossed US $100 m of sales in this quarter for the first time.

  • Operating margins rose 550 bps to 31.1% due to a fall in other expenditure and staff costs. The other expenditure fell by 420 bps accompanied by 140 bps fall in the staff expenses. This was due to trimming of operations at Negma in France where the profit margins were very small.

  • The company reported net profit growth of 50.1% YoY due to a strong growth at the operating level. The net profits increase would have been even better had it not been for the sharp rise in taxes.

  • Wockhardt's debt level at the end of 2QFY12 was around Rs 37.9 bn making its debt to equity ratio at 2.6 times. Though the number for this quarter has not been provided, we have estimated that the debt has reduced further. Though it is quite high, it is lower than that in FY11. The company restructured its debt obligation with secured lenders and is now expected to pay its debt starting 2015.

  • On the sale of its nutritional business to Danone, the court has directed Wockhardt to clear the FCCB holders' installments and has given a go-ahead to divest the nutritional business. Apart from the payments of Rs 850 m and Rs 300 m made by Wockhardt in December 2011 and January 2012 respectively, the company has to complete its last payment of Rs 1,000 m by March 2012.

What to expect?
At the current price of Rs 614, the stock is trading at a multiple of 11.5 times our estimated FY14 earnings. In the domestic market, Wockhardt has created a strong presence by expanding its reach across India. The company has shown a phenomenal growth in the US market in the last few quarters and is expected to show a good growth ahead. However, the European market is facing problems with the French operations already closed.

Since last year, the management has stopped discussing its business with the investor and analyst community. Due to the FCCB issues nearly getting resolved and company's strong performance over the last 9 months, the stock price has gone up significantly. After the recent rise in the stock price and no communication from the management, we advise investors to remain cautious while investing in the stock.

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