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Wockhardt: Top up, bottom down - Views on News from Equitymaster

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Wockhardt: Top up, bottom down
Apr 29, 2008

Performance summary
  • Revenues grow by 54% YoY during 1QCY08 led by strong performance in Europe and in the US backed by acquisitions.
  • Growth in Europe was driven by the contribution from Negma (France) acquired in May 2007 and the UK business.

  • EBDITA margins remain stable at 22.1%.

  • Net profits grow by a considerably slower 16% YoY (if one excludes the extraordinary expense during the quarter) and is impacted by a steep rise in interest expenses.

Financial performance: A snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 5,228 7,857 50.3%
Expenditure 4,069 6,120 50.4%
Operating profit (EBDITA) 1,159 1,737 49.9%
Operating profit margin (%) 22.2% 22.1%  
Other income 22 45 104.5%
Interest 129 565 338.0%
Depreciation 181 241 33.1%
Profit before tax 871 976 12.1%
Extraordinary item - (279)  
Tax 208 205 -1.4%
Profit after tax /(loss) 663 492 -25.8%
Net profit margin (%) 12.7% 6.3%  
No. of shares (m) 109.4 109.4  
Diluted earnings per share (Rs m)   33.4  
P/E ratio (x)*   9.1  
* on a trailing 12-month basis

What has driven performance in 1QCY08?
  • Wockhardt’s domestic business registered a 13% YoY growth in 1QCY08, which was largely driven by the therapeutic areas of dermatology, oncology and diabetology, growth in power brands and new product launches. While the growth of the biotech division was led by its key brands ‘Wepox’ and ‘Wosulin’, the infant foods business grew by 21% YoY. Wockhardt has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market and launched 3 in-licensed products out 0f the 5 products that it launched in 1QCY08.

    Revenue: Geographical mix
    (Rs m) 1QCY07 1QCY08 Change
    India 1,831 2,059 12.5%
    Europe 2,499 4,220 68.9%
    US 493 1,188 141.0%
    Rest of the world (ROW) 405 390 -3.7%
    Total 5,228 7,857 50.3%

  • Revenues from the US business grew by a healthy 141% YoY during the quarter led by the strong growth in Wockhardt’s base business and the integration of Morton Grove (acquired in 3QCY07) with the overall business. The company received 5 new ANDA approvals in 1QCY08, including 1 injectable and 1 NDDS and launched 2 products during the quarter including ‘Azithromycin’ tablets, whose market size is in excess if US$ 350 m. Wockhardt now has 35 ANDAs pending approval, with over US$ 25 bn in brand value.

    Revenue: Business mix
    (Rs m) 1QCY07 1QCY08 Change
    Formulations 4,777 7,625 59.6%
    Bulk 451 232 -48.6%
    Total 5,228 7,857 50.3%

  • Europe is at present the largest contributor to Wockhardt’s revenues (54%) and reported a splendid 69% YoY growth in 1QCY08. This growth was led by the UK business, which in turn was driven by the generics and hospitals businesses and its strong relationship with Amylin (contract manufacturing for the product ‘Byetta’). Having said that, revenues of Pinewood declined marginally due to a depreciating UK Pound Sterling as nearly half of the revenues are contributed by exports from Ireland to the UK. Besides this, 1QCY07 numbers do not include Negma (this company was acquired in May 2007) and hence the growth this quarter was magnified to that extent.

  • Operating margins during the quarter remained stable at 22.1%. Wockhardt was also able to turn around the operations of Morton Grove during the quarter. However, the bottomline growth was hampered (down 26% YoY) due to the sharp rise in interest costs and mark-to-market losses of Rs 279 m, which has been classified as an extraordinary expense. If one excludes the extraordinary expense then the bottomline has grown by 16%, which is considerably slower than the 50% growth in operating profits.

What to expect?
At the current price of Rs 304, the stock is trading at a multiple of 7.4 times our estimated CY09 earnings. In the domestic market, biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt going forward. As far as Europe is concerned, Wockhardt is looking to create value from the Pinewood acquisition by reducing operating costs, sourcing products globally and leveraging on its existing product basket. Besides this, the acquisition of Negma is also expected to widen Wockhardt’s product portfolio and strengthen its presence in the European region. Focus on the hospital segment and contract manufacturing is also part of Wockhardt’s strategy for the European market.

In the US market, besides stepping up the pace of product launches, the company's focus on niche and difficult to replicate products will be the key due to relatively lesser competition in these areas. As regards Morton Grove, while Wockhardt has turned around the operations of this company during the quarter, the emphasis will be on ensuring that Morton achieves margins at Wockhardt’s level in the next 24 to 36 months. Pricing pressure in the US and German markets, slower growth in the rest of the world markets and high interest costs would continue to remain a cause for concern going forward. Overall, we maintain our positive view on the stock.

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