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Wockhardt: Sustainability is the key

Aug 4, 2004

Introduction to results
Domestic pharma company, Wockhardt, declared its 2QCY04 and 1HCY04 results recently. In 2QCY04 quarter, the topline grew by 37% led by a good performance in the European market, where its subsidiaries viz. CP pharma and Wallis Labs registered impressive performance. The bottomline grew by 43% basically lead by volume growth. In the first half of the current year, sales grew by 55%, while the bottomline has grown by 119%. However, the growth numbers are not strictly comparable owing to the new acquisitions.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 2,110 2,892 37.1% 3,729 5,775 54.9%
Other income 6 4 -33.3% 9 7 -22.2%
Expenditure 1,680 2,201 31.0% 3,141 4,505 43.4%
Operating profit (EBDITA) 430 691 60.7% 588 1,270 116.0%
Operating profit margin (%) 20.4% 23.9%   15.8% 22.0%  
Interest 19 38 100.0% 33 31 -6.1%
Depreciation 49 88 79.6% 102 176 72.5%
Profit before tax 368 569 54.6% 462 1,070 131.6%
Tax 18 68 277.8% 30 125 316.7%
Profit after tax/(loss) 350 501 43.1% 432 945 118.8%
Net profit margin (%) 16.6% 17.3%   11.6% 16.4%  
No. of shares (m) 15.3 109.0   36.3 109.0  
Diluted earnings per share (Rs)*       11.9 17.3  
P/E ratio (x)         14.9  
(* annualised)            

What's the company's business?
Wockhardt is one of the leading domestic pharma companies with strong presence in the lifestyle segment and growing focus on biotechnology. The company, a few years back, was a player in the domestic market but intense price competition and price regulations prevalent in the domestic markets have resulted in the company gradually shifting its focus to exports. Consequently, Wockhardt acquired two UK-based companies Wallis Laboratories and CP Pharma. The company derives 57% of its revenues from the export markets. The company 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 2QCY04?
Acquisition adds momentum: Growth in the current quarter was basically driven by strong performance in the European market, which has in fact compensated for the slower growth in the US market. The European market grew by 250%, because of the consolidation of CP pharma numbers in the company's account. To that extent, growth is inflated. US sales fell by 17% on back of capacity constraints, which occurred due to closure of manufacturing facilities for USFDA inspection. The sales in the domestic market were up 2%. Here it is important to note that the second quarter of 2003 showed exceedingly high sales due to the pent-up demand of the first quarter getting fulfilled in second quarter (1QCY03 sales being low due to FMRAI issue). Besides, this VAT issue also contributed to this higher sales in the month of April and May. However, despite all this, the company's diabetology, nephrology and biotechnology segments have shown robust growth, which was mainly due to launch of new products.

Geographical Mix…
  2QCY03 2QCY04 Growth
India 1,248 1,278 2.4%
Europe 333 1,162 249.4%
US 242.8 203 -16.4%
Rest of World 287 249 -13.2%
Total 2,110 2,892 37.0%

Higher export contribution drives margins: The operating profit grew faster than the revenues. The basic reason for this could be the increased contribution from the European markets, wherein margins are higher. Also, increased contribution from the high margin formulations business has also expanded operating margin. However, this margin profile is likely to be affected once competition picks up in the European markets.

Business Mix…
  2QCY03 2QCY04 Growth
Formulations 1,671 2,437 45.9%
Bulk Drug 440 455 3.5%
Total 2,110 2,892 37.0%

Higher interest subdues net profit growth: Net profit grew by 43% in the quarter and by 119% in the first half of the current year. The lower growth in the second quarter's net profit compared to the operating profit was basically due to higher interest outgo and higher tax charges. The interest outflow will increase further, owing to borrowing to fund acquisitions. Also, as the company's contribution from the European operation increases, the tax outgo could increase, as effective taxes are higher in those countries.

What to expect?
At Rs 258, the stock is trading at 15x annualized 1HCY04 earnings. Wockhardt, despite its early mover advantage, has failed to capitalise on the same over the years. But with its recent focus on the international markets and some prudent acquisition in Europe, growth prospects are promising. The company has achieved significant topline and bottomline growth in the last three-quarters, basically on the back of inorganic growth. However, it must be noted that the company has achieved the threshold on margins front and further improvement from the current level will be limited.

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