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Wockhardt: Inorganic benefits - Views on News from Equitymaster

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Wockhardt: Inorganic benefits
Jul 26, 2007

Performance summary
  • Revenues grow by 53% YoY led by strong performances in the US (up 34% YoY) and Europe (up 113% YoY).

  • The growth in Europe was driven by the contribution from Pinewood Laboratories, Ireland acquired in October 2006 and from Negma, France acquired in May 2007.

  • EBDITA margins expand by 240 basis points (2.4%) owing to a considerable reduction in raw material costs and R&D expenditure (as percentage of sales).

  • PAT grows by 62% YoY due to strong performance at the operating level.

Financial performance: A snapshot
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Net sales 4,127 6,303 52.7% 7,637 11,531 51.0%
Expenditure 3,230 4,781 48.0% 6,051 8,850 46.3%
Operating profit (EBDITA) 897 1,522 69.7% 1,586 2,681 69.0%
Operating profit margin (%) 21.7% 24.1%   20.8% 23.3%  
Other income 24 25 4.2% 135 47 -65.2%
Interest - 85   - 214  
Depreciation 140 172 22.9% 277 353 27.4%
Profit before tax 781 1,290 65.2% 1,444 2,161 49.7%
Extraordinary item - -   (604) -  
Tax 147 266 81.0% 242 474 95.9%
Profit after tax /(loss) 634 1,024 61.5% 598 1,687 182.1%
Net profit margin (%) 15.4% 16.2%   7.8% 14.6%  
No. of shares (m) 109.4 109.4   109.4 109.4  
Diluted earnings per share (Rs m)         30.1  
P/E ratio (x)*         13.2  
* on a trailing 12-month basis

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 and a growing focus on biotechnology. With acquisitions in the international markets, the company has demonstrated its growing global ambitions. During CY06, Wockhardt derived 61% of its revenues from non-India regions (63% in CY05). Wockhardt has a subsidiary in the UK, which holds 100% in CP Pharma and Wallis Laboratories. The company has acquired ‘Esparma GmbH’ in Germany, ‘Pinewood’ in Ireland and ‘Negma’ in France and has set up presence in Brazil and the US. The company spent about 3.5% of consolidated revenues on R&D in CY06 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 2QCY07?
The India story: Wockhardt’s domestic business registered a 16% YoY growth in 2QCY07. This growth was largely driven by the company’s focus on high-end niche therapeutic areas, strengthening its presence in existing businesses and new product launches. Revitalisation of the acquired business of Dumex India with its flagship brands ‘Farex’ and ‘Protinex’ has not only augmented the company’s nutritional portfolio but has also boosted the performance of the Indian business. Wockhardt has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market. During the quarter, the company signed 2 in-licensing agreements with Crawford, UK and Gnosis, Italy.

Revenue: Geographical mix
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
India 1,742 2,025 16.2% 3,090 3,856 24.8%
Europe 1,653 3,518 112.8% 2,949 6,017 104.0%
US 380 510 34.2% 809 1,003 24.0%
Rest of the world (ROW) 352 250 -29.0% 789 655 -17.0%
Total 4,127 6,303 52.7% 7,637 11,531 51.0%

US – Ramp up in launches: Revenues from the US business grew by 34% YoY during the quarter and was largely led by the robust 51% YoY growth in formulations. The company received 8 new ANDA approvals, which included two injectables. With 5 product launches in the first half, Wockhardt is now marketing 21 products in the US market, out of which 6 are injectables.

Revenue: Business mix
(Rs m) 2QCY06 2QCY07 Change 1HCY06 1HCY07 Change
Formulations 3,731 5,966 59.9% 6,818 10,743 57.6%
Bulk 396 337 -14.9% 819 788 -3.8%
Total 4,127 6,303 52.7% 7,637 11,531 51.0%

Europe – Growing inorganically: The 113% YoY revenue growth clocked by the European region during the quarter was primarily driven by a healthy performance across the existing geographies of the UK and Germany, new product launches and the newly acquired businesses of Pinewood Laboratories (Ireland) and Negma (France). While the company has not divulged details, both the UK and Germany have recorded strong growth during the quarter, with the company having launched 3 new products in the German market. Pinewood also maintained its growth and exhibited an improvement in its margins. Besides this, the company had acquired Negma Laboratories in France having revenues of US$ 150 m, which marked Wockhardt’s entry into France thereby bolstering its presence in the European region.

Margins expand: Operating margins during the quarter improved by 240 basis points (2.4%) owing to the fall in R&D and raw material costs (as percentage of sales). While Dumex India has achieved breakeven, improved margins of Pinewood has also played its part in boosting the overall margins of Wockhardt.

Cost break-up
  2QCY06 2QCY07 1HCY06 1HCY07
Raw material consumption 24.1% 15.6% 22.7% 20.6%
Purchase of finished goods 14.0% 21.0% 14.8% 17.1%
Staff cost 13.6% 16.9% 14.6% 16.3%
R&D expenditure 6.6% 2.2% 6.6% 2.6%
Other expenditure 19.9% 20.2% 20.6% 20.1%

Bottomline scenario: Strong performances at both the topline and the operating profit level led to the robust 62% YoY growth in the bottomline. Having said that, this growth is relatively slower than the operating profit growth due to higher interest costs and tax charges.

Quarterly trend
(%) 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07 2QCY07
Sales growth (YoY) 13.4% 9.4% 21.8% 43.7% 48.7% 52.7%
Operating profit margin 19.6% 21.7% 22.2% 23.2% 22.2% 24.1%
Net profit margin -1.1% 15.4% 16.9% 16.5% 12.7% 16.2%

What to expect?
At the current price of Rs 396, the stock is trading at a price to earnings multiple of 12.9 times our estimated CY08 earnings. In the domestic market, biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt going forward. The company’s strategy in the domestic market is to increase market reach and penetration of existing products and focus on new product launches through the in-licensing route. As far as Europe is concerned, Wockhardt will look 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. In the US market, the company's focus on injectables will be the key, as this field has relatively lesser competition due to the complex technology involved and high level of investment required.

The company is also looking to ramp up its ANDA filings in the US market going forward. On the biotech front, the company’s focus will be on insulin for which the regulatory pathway has been made clear in Europe and will look to file the product in CY08. However, pricing pressure in the US and German markets would continue to remain a cause for concern going forward. Overall, we maintain our positive view on the stock.

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