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Wockhardt: Showing signs of turnaround
May 23, 2011

Wockhardt has declared its 4QFY11 results. The company has reported a 7.7% YoY growth in net sales. The profit after tax for the quarter was Rs 1,618 m as compared to the loss of Rs 5,651 m in fourth quarter of the last year. Here is our analysis of the result.

Performance summary
  • Net sales increase by 7.7% YoY in the fourth quarter of 2011 (4QFY11) on account of strong growth in the US and Europe business.
  • Operating margins (EBITDA) increase from 18.1% to 28.2% led by decrease in raw material cost, R&D expenses and improvement in efficiency.
  • The company reports profit after tax of Rs 1,618 m as against a loss of Rs 5,651 m in fourth quarter of the last year led by strong operational performance and a foreign exchange gain.


Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change 15 months ending March 2010 FY11 Change
Net sales 8,720 9,387 7.7% 45,014 37,512 -16.7%
Expenditure 7,140 6,737 -5.6% 36,783 28,425 -22.7%
Operating profit (EBDITA) 1,580 2,650 67.7% 8,232 9,087 10.4%
EBDITA margin (%) 18.1% 28.2%   18.3% 24.2%  
Other income 51 23 -54.5% 295 159 -46.1%
Interest (net) 705 901 27.9% 3424.8 2671 -22.0%
Depreciation 264.7 271.4 2.5% 1,481 1,166 -21.3%
Profit before tax 661 1,500 126.9% 3,621 5,409 49.4%
foreifn exchange loss / (gain) 160 -1,595   528 -1,367  
Exceptional Item -6,333 -1721   -12,949 -5,732  
Tax Expense / (Credit) -243 -288 18.5% 167 87 -48.1%
Minority interest -63 -44   16 -52  
Profit after tax/(loss) -5,651 1,618 -128.6% -10,007 905  
Net profit margin (%) -64.8% 17.2%   -22.2% 2.4%  
No. of shares (m)       109.4 109.4  
Diluted earnings per share (Rs)       -91.4 8.3  
Price to earnings ratio (x)         43.0  

Footnote: The Company changed its year ending from calendar year to financial year. For this reason, the 12 months period ending March 2011 is not comparable with the 15 months period ending March 2010.

What has driven performance in 4QFY11?
  • Wockhardt's net sales increased by 7.7% YoY in 4QFY11 led by growth in the existing products and new launches. The US market for the full year grew by staggering 70% YoY. The company markets more than 110 products in the US market. Out of these, 13 products are ranked in the top slot in their therapeutic groups with another 15 taking a second place. For the full year the company's domestic sales grew by 15% YoY and the EU sales grew by healthy 14.5% YoY, better than that of industry.

  • Wockhardt's operating margins (EBITDA) during 4QFY11 increased by 10.1% to 28.2% led by decrease in raw material cost, R&D expenses and efficiency improvement. The raw material as a % of sales decreased by 6.2% to 12.6% due to the improvement in efficiency. Also, the R&D costs have now been reduced to zero and the other manufacturing expenses decreased by 4% (as a % of sales) to 18.9%. This helped to achieve good growth at the operating levels.

  • Further, the company posted a profit of Rs 1.6 bn during the quarter at the net level due to strong operational performance. The loss in exceptional items was offset by the gain in foreign exchange. If we adjust the profit after tax for exceptional items and foreign exchange gain for both the years the profit almost doubled for the last quarter on aYoY basis.

What to expect?
At the current price of Rs 336, the stock is trading at a price to earnings multiple of 8 times our estimated FY13 earnings (ResearchPro subscribers, kindly click here).

As far as the business is concerned, while the US and Indian businesses have been doing well, the real test will be whether Wockhardt will be able to sustain this growth going forward. The major problem that Wockhardt is facing is on the debt front. This has made projections for the future very tricky. The company is strapped for cash and is having considerable problems handling its external obligations especially it's FCCBs. On excluding the impact of the huge extraordinary expense during the year and the forex gain, the company has performed a bit better than our estimates. However, given the uncertainty surrounding the company, we believe that there are better plays in the pharma sector.

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