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Wockhardt: Growth in the genes?
Jul 19, 2005

Performance summary
Wockhardt has announced strong results for the second quarter and half year ended June 2005. Growth in the company’s international business, powered by strong performance of the formulations segment, was the key driver. Also, savings on the cost front and the consequent expansion in operating margins has propelled a stronger growth in the bottomline.

Consolidated numbers
(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Net sales 2,928 3,771 28.8% 5,836 6,867 17.7%
Expenditure 2,236 2,812 25.8% 4,565 5,309 16.3%
Operating profit (EBIDTA) 692 959 38.6% 1,271 1,558 22.6%
Operating profit margin (%) 23.6% 25.4%   21.8% 22.7%  
Other income 3 33 1000.0% 6 124 1966.7%
Interest 38 46 21.1% 31 105 238.7%
Depreciation 88 107 21.6% 175 210 20.0%
Profit before tax 569 839 47.5% 1,071 1,367 27.6%
Tax 68 64 -5.9% 125 176 40.8%
Profit after tax/ (loss) 501 775 54.7% 946 1,191 25.9%
Net profit margin (%) 17.1% 20.6%   16.2% 17.3%  
No. of shares (m) 109.0 109.0   109.0 109.0  
Diluted earnings per share (Rs)*       17.4 21.9  
P/E ratio (x)         20.4  
(* annualised)            

What is the company’s business?
Wockhardt Ltd, a subsidiary of Khorakiwala Holdings and Investments Pvt. Ltd (75% stake), is one of the leading domestic pharmaceutical companies with strong presence in the lifestyle segment with a growing focus on biotechnology. With acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY04, Wockhardt derived 60% of its revenues from non-India regions (up from 54% in CY03). Wockhardt has a subsidiary in the UK, which holds 100% in CP Pharma and Wallis Laboratories. The company has acquired ‘esparma GmbH’ in Germany and has set up presence in Brazil and the US. It is one of the largest spenders on R&D among its domestic peers (about 8% of consolidated revenues) and has proven its R&D capabilities by indigenously developing and launching Biovac-B (Hepatitis-B vaccine), Wepox (Erythropotein) and Wosulin (human insulin).

What has driven performance in 2QCY05?
India recovers:  Strong domestic sales in 2QCY05 (23% YoY growth) ensured that the share of India to the total revenues increased from 29% in 1QCY05 to 36% in the second quarter. Wockhardt’s lifestyle portfolio continued to clock good growth due to its focus on the key areas of diabetology, biotech and nephrology. Its biotech portfolio grew by 61% during the quarter. As regards its diabetology portfolio, its key insulin brand – Wosulin, grew by over 50% YoY and continues to increase its market share in the segment. Also, the company’s strategy of focusing on its key brands have contributed to the robust revenue growth from this region. However, it must be noted that for 1HCY05, revenues recorded a slower 5% YoY growth. This was due to VAT and MRP based excise related concerns, which plagued the first quarter.

Geographical mix
(Rs m) 2QCY04 2QCY05 Growth
India 1,280 1,569 22.6%
Europe 1,176 1,425 21.2%
US 212 404 90.6%
Rest of the world 260 372 43.1%
Total 2,928 3,770 28.8%
Business mix
(Rs m) 2QCY04 2QCY05 Growth
Formulations 2,455 3,385 37.9%
Bulk drugs 473 385 -18.6%
Total 2,928 3,770 28.8%

US and ROW shines:  The US operations continued to gain significant momentum during the second quarter, which was highlighted by the fact that revenues clocked a robust 90% YoY growth. This growth was mainly led by its formulation business, which grew by over 300% during the quarter. Besides Famotidine, which was launched in the first quarter, two of its existing main products, ‘Betanechol’ and ‘Enalapril’ also witnessed substantial growth leading to a considerable improvement in its market share. US business is likely to receive a further boost, as Wockhardt is expecting more approvals. The company is also looking to enter into strategic alliances with various established players in the US market.

The Rest of the World (ROW) region grew by an impressive 43% during the quarter driven by healthy CIS business and biotech performances. During the quarter, the company received the 3 more registrations for its biotech portfolio, taking the total number of biotech registrations to 20.

Europe story:  This region, which is the largest contributor to Wockhardt’s revenues, posted a healthy 21% YoY growth in revenues, chiefly driven by its formulation business (up 28% YoY). As far as the German markets are concerned, Esparma, which has been acquired by Wockhardt, launched ‘Lamotrigine’ on Day 1 of the drug going off-patent. It must be noted that Germany is the largest branded generics market in Europe.

Cost break-up
(% of sales)  2QCY04 2QCY05 1HCY04 1HCY05
(Increase)/decrease in stock -0.7% 0.9% -0.5% 1.9%
Raw material consumption 23.2% 25.8% 24.2% 24.3%
Purchase of finished goods 20.2% 15.4% 18.4% 15.5%
Staff cost 12.7% 11.5% 13.2% 12.9%
R&D expenditure 4.6% 4.1% 5.0% 4.7%
Other expenditure 16.4% 16.8% 17.9% 18.1%

Bottomline blooms:  Healthy topline growth and improvement in the operating margins trickled down to the bottomline, which rose 55% YoY during the quarter. Expansion in the operating margins was the result of consistent cost control initiatives taken by the company.

Over the last few quarters:  The company has achieved robust growth on the back of its inorganic strategy over the past few quarters. Apart from this, changing geographical mix and streamlining of operations has helped Wockhardt to maintain healthy margins.

What to expect?
At the current price of Rs 445, the stock is trading at a price to earnings multiple of 20.4 times its annualised 1HCY05 earnings and 13.1 times our estimated CY07 earnings. Going forward, on the domestic business front, biotech and diabetology will continue to remain the key growth drivers. Also, continued focus on its power brands will help the company sustain revenue growth. The international business is expected to significantly drive growth and garner a larger share of the revenue pie.

Wockhardt has also commenced its new plant at Baddi, Himachal Pradesh, which is likely to provide various fiscal advantages in the near term. We had given a BUY recommendation on the stock in March 2005, with a target price of Rs 510 with a 2-3 year perspective. We maintain our view.

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