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Wockhardt: Bogged by interest costs - Views on News from Equitymaster

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Wockhardt: Bogged by interest costs
Jul 1, 2008

Performance summary
  • Revenues grow by 49% YoY during 1HCY08 (December ending fiscal) led by strong performance in Europe and 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 improve marginally by 0.2% during 1HCY08 led by a fall in raw material costs (as percentage of sales).
  • Bottomline grow by a considerably slower 4% YoY during the half year period (if one excludes the extraordinary expense on account of derivative losses incurred in 1QCY08) and is impacted by a steep rise in interest expenses.

Financial performance: A snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 6,303 9,350 48.3% 11,531 17,207 49.2%
Expenditure 4,781 7,042 47.3% 8,850 13,162 48.7%
Operating profit (EBDITA) 1,522 2,308 51.6% 2,681 4,045 50.9%
Operating profit margin (%) 24.1% 24.7%   23.3% 23.5%  
Other income 25 22 -12.0% 47 67 42.6%
Interest 85 880 935.3% 214 1,445 575.2%
Depreciation 172 252 46.5% 353 493 39.7%
Profit before tax 1,290 1,198 -7.1% 2,161 2,174 0.6%
Extraordinary item - 104   - (175)  
Tax 266 261 -1.9% 474 466 -1.7%
Share of profit from associate - 22   - 39  
Profit after tax /(loss) 1,024 1,063 3.8% 1,687 1,572 -6.8%
Net profit margin (%) 16.2% 11.4%   14.6% 9.1%  
No. of shares (m)         109.4  
Diluted earnings per share (Rs m)*         33.8  
P/E ratio (x)*         5.7  
* on a trailing 12-month basis

What has driven performance in 1HCY08?
  • Wockhardt’s domestic business registered a 13% YoY growth in 1HCY08, which was largely driven by the company’s focused marketing efforts in strengthening the existing and new specialty areas. The company has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market. In this regard, it signed an in-licensing agreement with Sinclair, UK covering four products. Overall, the company launched 3 new products during 2QCY08; two were from the in-licensed product pipeline and the third was Protinex Total).

    Revenue: Geographical mix
    (Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
    India 2,025 2,304 13.8% 3,856 4,363 13.1%
    Europe 3,099 4,630 49.4% 5,250 8,850 68.6%
    US 797 1,819 128.2% 1,528 3,007 96.8%
    Rest of the world (ROW) 381 597 56.7% 896 987 10.2%
    Total 6,302 9,350 48.4% 11,530 17,207 49.2%

  • Revenues from the US business grew by a healthy 97% YoY during 1HCY08 led by new product launches, strengthening of the existing product portfolio and the integration of Morton Grove (acquired in 3QCY07) with the overall business. Morton Grove’s performance was enhanced with strong sales from the products ‘Hydrocodone’ and ‘Hydroxyzine’. The company received 12 new ANDA approvals in 1HCY08 and is awaiting approvals for another 42. Wockhardt now has 61 products in the US market, including 36 from the Morton Grove portfolio. Revenue: Business mix

  • Europe is at present the largest contributor to Wockhardt’s revenues (52%) and reported a splendid 69% YoY growth in 1HCY08. This growth was led by the UK operations, which in turn was driven by the strong growth from its custom manufacturing business. Having said that, Pinewood had a difficult 1HCY08 due to a depreciating UK Pound against the Euro as nearly half of the revenues are contributed by exports from Ireland to the UK. Besides this, 1HCY07 numbers include Negma’s revenues from May 2007 onwards and hence the growth during 1HCY08 was magnified to that extent. The German business did well during the second quarter recording a double-digit growth with one new product launched.

  • Operating margins during 1HCY08 improved marginally by 0.2% due to a fall in raw material costs (as percentage of sales). However, the bottomline growth was hampered (down 7% YoY) due to the sharp rise in interest costs and extraordinary expense of Rs 175 m. If one excludes the extraordinary expense then the bottomline has grown by 4%, which is considerably slower than the 51% growth in operating profits during the half year period. Interest costs surged on the back of an increase in borrowings to fund various acquisitions. Wockhardt’s debt to equity ratio stood at 2.3 in FY08.

What to expect?
At the current price of Rs 192, the stock is trading at a multiple of 3.8 times our estimated CY10 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, the company 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, now that Wockhardt has turned around the operations of this company, 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. The stock is currently trading at very attractive valuations and despite lowering our price band we maintain our positive view on the stock.

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