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Wockhardt: Extraordinary impact!
Apr 25, 2006

Performance summary
Wockhardt announced mixed results for the first quarter ended March 2006 late yesterday. While the topline has recorded a 13% YoY growth, led by its biotech business and superlative performance of the domestic operations, margins witnessed a marginal expansion. Despite this, the company has recorded a net loss on the back of due diligence expenses carried out during the quarter as part of the strategy to pursue inorganic growth.

Consolidated numbers
(Rs m) 1QCY05 1QCY06 Change
Net sales 3,096 3,510 13.4%
Expenditure 2,498 2,821 12.9%
Operating profit (EBIDTA) 598 689 15.2%
Operating profit margin (%) 19.3% 19.6%  
Other income 91 110 20.9%
Interest 58 -  
Depreciation 103 137 33.0%
Profit before tax 528 662 25.4%
Extraordinary item - (604)  
Tax 111 95 -14.4%
Profit after tax/ (loss) 417 (37) -108.9%
Net profit margin (%) 13.5% -1.1%  
No. of shares (m) 109.2 109.4  
Diluted earnings per share (Rs)*   19.4  
P/E ratio (x)*   23.8  
(* 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 1QCY06?
India shines: Wockhardt’s Indian operations clocked an impressive 51% YoY growth during the quarter powered by the formulations business, which grew by 58% YoY. One of the reasons for this growth was the low base effect. This was because, in 1QCY05, sales had been affected due to VAT related issues. Besides this, the key portfolios of Wockhardt also contributed to this strong performance during 1QCY06. Its businesses of Biotech, Nephrology and Diabetology witnessed growth of 45%, 88% and 53% YoY respectively.

Geographical mix
(Rs m) 1QCY05 1QCY06 Change
India 893 1,348 51.0%
Europe 1,371 1,296 -5.5%
US 368 429 16.6%
Rest of the world (ROW) 465 437 -6.0%
Total 3,097 3,510 13.3%

US business slows down: The US business recorded a relatively slower growth of 17% YoY during the quarter. While the formulations business grew by 8% YoY, it was the 34% YoY growth in bulk drugs business, which contributed to the overall performance in the US market. It must be noted that formulations reported a staid growth largely due to pricing pressure, which has begun to catch up with the company (the US business had grown 40% YoY in CY05). Wockhardt received approval for ‘Ranitidine 75 mg’ and commenced marketing 4 new products during the quarter.

Business mix
  1QCY05 1QCY06 Change
Formulations 2,648 3,087 16.6%
Bulk drugs 449 423 -5.8%
Total 3,097 3,510 13.3%

Poor show in Europe: Sales from the European region declined by 6% YoY during the quarter, which was due to a 2% YoY fall in formulations and 64% YoY decline in the bulk drugs business. It must be noted that Europe currently contributes around 40% to Wockhardt’s overall revenues with the major markets being the UK and Germany. The fall in revenues was mainly due to the severe pricing pressures witnessed in the UK market (pricing environment in the UK market is generally more or less similar to that in the US). However, Germany managed to grow by a decent 10% YoY. As far as product launches are concerned, the company launched ‘Tamsulosin’ on Day 1 of its going off patent in Germany.

Operating margins and profitability picture: Operating margins expanded by a marginal 30 basis points during 1QCY06. The company recorded a net loss despite a reduction in interest expense and tax outgo. This was due to extraordinary expenses of Rs 604 m (inclusive of Rs 228 m related to inorganic growth initiatives in the US market). If one were to exclude this extraordinary effect, the bottomline has actually grown by 36% YoY. Investors should note that while Wockhardt has been aggressively scouting for acquisitions globally, it has not yet been successful in acquiring a company. The extraordinary expense also includes Rs 376 m of expenses on account of additional charge-backs relating to US sales for previous years.

Quarterly trend
(%) 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05 1QCY06*
Sales growth (YoY) 21.1% 6.5% 28.8% 12.0% 5.4% 13.4%
Operating profit margin 21.6% 19.3% 25.4% 24.3% 23.3% 19.6%
Net profit growth (YoY) 25.6% -6.1% 54.7% 16.5% 15.7% -
* Net loss during the quarter

What to expect?
At the current price of Rs 461, the stock is trading at a price to earnings multiple of 16.3 times our estimated CY08 earnings, which is at the higher end of our valuation spectrum. Going forward, on the domestic business front, we expect that biotech and diabetology will continue to remain key growth drivers for the company. Also, continued focus on its power brands will help in sustaining revenue growth in the future. The international business, especially the US, is expected to drive growth and garner a larger share of the revenue pie. That said, pricing pressure in the US and the UK markets would continue to remain a cause for concern.

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