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Wockhardt: Encouraging despite India blues

Apr 20, 2005

Performance Summary
Domestic pharma company, Wockhardt, has reported lacklustre numbers for the March quarter. The company has reported just over 6% YoY growth in topline. However, profits have declined by 6% for the quarter. This can largely be attributed to a dip in the India operations, where owing to VAT blues dealers are not stocking pharma products. However, this is temporary phenomenon and things will improve going forward.

Consolidated picture
(Rs m) 1QCY04 1QCY05 Change CY04 YoY Change
Net sales 2,908 3,096 6.5% 12,389 31.5%
Expenditure 2,329 2,497 7.2% 9,577 25.6%
Operating profit (EBDITA) 579 599 3.5% 2,812 56.7%
Operating profit margin (%) 19.9% 19.3%   22.7%  
Other income 3 91 2933.3% 158 113.5%
Interest (7) 58 - (17) -
Depreciation 88 103 17.0% 368 37.8%
Profit before tax 501 529 5.6% 2,619 64.0%
Extraordinary expenditure -   - (113) -
Tax 57 112 96.5% 371 117.0%
Profit after tax/(loss) 444 417 -6.1% 2,135 49.7%
Net profit margin (%) 15.3% 13.5%   17.2%  
No. of shares (m) 72.6 109.0   109.0  
Diluted earnings per share (Rs)* 16.3 15.3   19.6  
P/E ratio (x)   22.7      
(* annualised)          

What's the company's business?
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd, is one of the leading domestic pharmaceutical companies with strong presence in the lifestyle segment and growing focus on biotechnology. However, with the recent acquisitions in the international markets, the company has demonstrated its growing global ambitions. The company derived 60% of its revenues from non-India regions (up from 54% in CY03). This pace is likely to continue going forward. 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 set up presence in Brazil and the US. It is one of the largest spenders on R&D among its domestic peers (about 8% of consolidated revenues) 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 1QCY05?
India blues: With a nearly 20% decline in revenues during the quarter owing to VAT related concerns, the India region clearly dampened the company's overall performance. As a result, this region, which contributed nearly 40% of CY04 revenues, saw its contribution go down to just 29% of consolidated revenues in 1QCY05. However, the company's lifestyle portfolio continued to clock good growth. Its diabetology portfolio grew by 25% during the quarter. Further, its key insulin brand – Wosulin, grew by over 50% YoY and continues to increase its market share in the segment.

US, ROW in reckoning: Wockhardt kept its promise of a strong resurgence in its US operations. Revenues grew by over 90% during the quarter, underlining the momentum. After a slowdown in the growth last year, the US business witnessed very healthy growth for both its formulations (77% growth YoY) and bulk operations (133%). During the quarter, Wockhardt received the approval for marketing Famotidine 10 mg, which is an OTC (over the counter) product. With this approval the company now has presence in the entire product range along with Famotidine 20 mg and 40 mg for which the company already has approval from the USFDA. The growth in the US business is likely to receive a further boost by the 10 new USFDA filings including 5 ANDAs. The total number of ANDAs pending for approval now stands at 14.

Geographical Mix…
(Rs m) 1QCY04 1QCY05 Change CY04 YoY Change
India 1,109 893 -19.5% 4,916 13.2%
Europe 1,234 1,371 11.1% 5,206 77.2%
US 193 368 90.7% 1,033 -4.1%
Rest of World 372 465 25.0% 1,233 15.9%
Total 2,908 3,097 6.5% 12,388 31.5%

The Rest of the World (ROW) region also grew at an impressive 25% during the quarter. During the quarter, the company received the first two registrations for its insulin in the international markets. With this, Wockhardt is now looking well poised to emerge as a truly global player for its biotech portfolio with all the three products (Wosulin, Biovac – B and Wepox) being registered in the international markets. Wockhardt till date has 17 registrations in various countries and 36 registrations are in the pipeline for its biotech products.

Europe story: Though European growth has slowed down post the acquisition spurt, the region still clocked a healthy 11% revenue growth. Just to put things in perspective, in CY04, 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.

Business Mix…
(Rs m) 1QCY04 1QCY05 Change CY04 YoY Change
Formulations 2,445 2,647 8.3% 10,616 36.5%
Bulk Drug 463 449 -3.0% 1,772 7.9%
Total 2,908 3,096 6.5% 12,388 31.5%

Profit view: Decline in India sales and the resultant pressure on margins saw net profit decline by 6% in the quarter. The company has recently issued FCCB's (foreign currency convertible bonds) worth US$ 110 m. The interest charges have increased due to that.

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 348, the stock is trading at price to earnings multiple 12 times our anticipated CY06 estimate. Owing to Wockhardt's focus on biotechnology and its plans for the international markets, 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.

The dip in domestic revenues is temporary and the region will bounce back soon. Therefore, we retain our BUY recommendation on the stock with a target price of Rs 510 with a 2-3 year perspective.

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