Jun 14, 2011|
The curious case of Wockhardt
From doing quite well in the early 2000s, Wockhardt's financial health quickly deteriorated post 2008. In this article, we will discuss the issues faced by Wockhardt that almost led to the fall of the company. We will also discuss on how the company managed the crisis and the risks of investing in the company having large acquisitions on the back of rising debt and venturing into exotic derivative products.
About the company
Wockhardt is a generic pharma player having its presence in formulations, nutritional products and bulk drugs. The company has its manufacturing units in India, Europe and the US with more than 65% of its revenues coming from outside India. It has also formed partnerships with many leading global pharma companies for providing formulations.
The growth period and ballooning debt
The company saw phenomenal growth in the last decade. For instance, the sales and operating profit went 5 times from 2001 to 2008. The company paid regular dividends and the stock price also went 4 times to Rs 400 in the same period. But this growth had come with a huge increase in total debt. Between 2003 and 2008, Wockhardt acquired seven companies internationally spending about Rs 22 bn. To name a few, it acquired Negma Laboratories in Europe, CP Pharmaceuticals in UK and Esparma & Pinewood Laboratories in Germany. The company seemed ready for the next level of growth. But it was important to note that, its debt had ballooned 14 times from Rs 3 bn to Rs 42 bn in that duration.
Debt burden and complex cross-currency trades led the fall
Wockhardt raised debt from domestic (mostly banks) as well as international markets. This debt was raised as a mix of secured loans and unsecured loans including the FCCBs (foreign currency convertible bonds). FCCBs are a special type of foreign loans that can later be converted to shares at the predetermined price. Apart from these loans; the company had entered into complex currency option contracts and structured products with banks. This was with a motive to hedge the currency exposure and to bring down its interest cost on foreign loans. But, in the year 2008, talks of a huge loss on these complex contracts surfaced. The company first denied it and later as a damage control exercise came out with a press release explaining the losses as a onetime event. Reality was that troubles had just begun for Wockhardt.
In the next 3 years (2008-2011), the company took a hit of around Rs 20 bn as exceptional items till 2011 on account of these complex transactions. These 3 years wiped off the entire profit of the last 10 years. That's not it. Banks stopped its funding and the company's operations were affected. It defaulted on loan repayments to banks. Some of these banks initiated negotiation proceedings abroad to reach a settlement. On the stock performance, the price decreased by more than 80% in one year. Habil Khorakiwala resigned as managing director and was replaced by his youngest son.
At its peak in 2008 the stock price traded at the price to earnings multiple of 25 times. The company was growing fast but its debt grew even faster. The management was aggressive in acquisitions. All this was slowly damaging the balance sheet. Plus, the company took speculative bets through complex currency trades and structured products. In 2008, forex loses triggered bad times for the company and the next 2 years or so was a very difficult period indeed.
In the next article, we will further discuss the ways by which the company managed to resolve some of its issues. We will also discuss the current problems that it still faces and the path ahead for the company.
More Views on News
Aug 14, 2017
A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.
Aug 14, 2017
GST impact coupled with price erosion in US leads to lower profits for the quarter.
Aug 8, 2017
Profits plunge due to higher raw material costs.
Jun 16, 2017
Here's what you can expect from The 5 Minute Wrapup in the coming months and years.
Jun 23, 2017
Net Profit lower due to exceptional items in the previous year.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407