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Wockhardt: Marred by debt and forex
May 18, 2009

Performance summary
  • Revenues grow by 35% YoY during CY08 led by strong performance in the US, Europe and India.
  • EBDITA margins reduce by 1.7% during CY08 led by a rise in staff costs and other expenditure (as percentage of sales).
  • The company reports a loss of Rs 1.4 bn at the net level during the year on account of lower other income, premium paid on FCCB and huge forex losses to the tune of Rs 5.8 bn.


Financial performance: A snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 7,619 9,519 24.9% 26,532 35,926 35.4%
Expenditure 5,719 7,554 32.1% 20,141 27,843 38.2%
Operating profit (EBDITA) 1,900 1,965 3.4% 6,390 8,082 26.5%
Operating profit margin (%) 24.9% 20.6% 24.1% 22.5%
Other income 74 131 76.4% 460 356 -22.7%
Interest 529 94 -82.2% 1,324 2,713 104.9%
Premium on FCCB - 1,295 - 1,295
Depreciation 235 369 56.5% 785 1,131 44.0%
Profit before tax 1,210 338 -72.1% 4,741 3,300 -30.4%
Extraordinary item - (5,546) - (5,810)
Tax 155 (1,493) 917 (916)
Share of profit from associate 33 137 33 205
Profit after tax /(loss) 1,088 (3,578) 3,858 (1,389)
Net profit margin (%) 14.3% -37.6% 14.5% -3.9%

What has driven performance in CY08?
  • Revenues from the domestic market grew by 20% YoY in CY08 led by growth in the existing products and launch of 13 new products in line with Wockhardt’s strategy of launching in-licensed products into the country. As per data released by the ORG IMS, the growth in the domestic formulations business was higher than the industry growth rate of 10%.

  • Revenues from the US business grew by a healthy 140% YoY during CY08 led by new product launches and strengthening of the existing product portfolio. The company received 23 ANDA approvals during the year and currently markets 65 products in the US. As far as Europe is concerned, revenues grew by 30% YoY driven by the UK business as both the generics and hospital business grew at a strong pace. Good growth was also reported by its French and German businesses. In Ireland, Pinewood improved its market share to 29%.

  • Wockhardt’s operating margins during CY08 reduced by 1.7% due to a rise in staff costs and other expenditure (as percentage of sales). Further, the company posted a loss of Rs 1.4 bn at the net level due to reduction in other income, payment of Rs 1.3 bn as premium on FCCB and forex losses to the tune of Rs 5.8 bn. Interest costs also surged on the back of an increase in borrowings to fund various acquisitions.

What to expect?
At the current price of Rs 98, the stock is trading at a price to earnings multiple of 1.9 times our estimated CY10 earnings. As far as the business is concerned, while the US and Indian businesses have been doing well, the real test will be whether the acquisitions that Wockhardt has made provide significant value to the overall business. The last two years saw the topline growing at a scorching pace precisely due to the revenue contribution from the acquired businesses. Therefore, CY09 will really test the mettle of the company. Further, the company is facing massive losses on the forex front, which have considerably hampered its profitability.

The troubles that Wockhardt is facing, especially on the balance sheet front, have made projections for the future very tricky. The company is strapped for cash and is having considerable problems handling its external obligations like debt and FCCBs. Valuations of the stock at the current levels appear very cheap probably because they deserve to be where they are. Thus, given the uncertainty surrounding the company, we believe that there are better plays in the pharma sector.

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