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Wockhardt: Subdued performance - Views on News from Equitymaster
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Wockhardt: Subdued performance
Aug 14, 2013

Wockhardt has announced its 1QFY14 results. The company has reported 1.3% YoY growth in sales and a decline of 14.3% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 1.3% YoY during the quarter due to poor growth in most of its business segments.
  • Operating margins declined by 5.0%% to 31.0% in 1QFY14 leading to a 12.8% YoY decline in operating profits.
  • Bottomline declines by 14.5% YoY during 1QFY14, on back of increase in overall expenses and poor topline growth.

(Rs m) 1QFY13 1QFY14 Change
Net sales 13,414 13,583 1.3%
Expenditure 8,586 9,373 9.2%
Operating profit (EBDITA) 4,828  4,210 -12.8%
EBDITA margin (%) 36.0% 31.0%  
Other income  91 61 -33.3%
Forex (loss)/gain (188) (210)  
Interest (net)  529 174 -67.1%
Depreciation  281 323 15.0%
Profit before tax 3,921  3,565 -9.1%
Exceptional (loss) -  47  
Share of Profit/(Loss) from Asso (15) -  
Tax  243 379 56.1%
Profit after tax/(loss) excluding discontinued operations 3,664  3,233 -11.8%
Profit/(loss) from discontinued operations  116  
Profit after tax/(loss) 3,780  3,233 -14.5%
Net profit margin (%) 28.2% 23.8%  
No. of shares (m)    108.0  
Diluted earnings per share (Rs)    140.7  
Price to earnings ratio (x)*    3.2  
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Topline grows by 1.3% YoY during the quarter due to poor growth in most of its business segments.

    (Rs m) 1QFY13 1QFY14 Change
    USA 6,530 7,220 10.6%
    India 2,424 2,503 3.3%
    EU 3,630 3,260 -10.2%
    UK 2,340 2,380 1.7%
    Ireland 560 390 -30.4%
    France 493 280 -43.2%
    RoW 830 600 -27.7%
    Total Sales 13,414 13,583 1.3%

  • US witnessed muted growth of of 7% YoY in constant currency terms and 11% YoY in Rupee terms in 1QFY14. The cmpany witnessed subdued growth on back of pricing pressures on its various drugs including its key product Toprol XL. This product contributes approx 14% of the total sales. Going forward the upcoming quarters are likely to witness lower sales than the current quarter, due to import ban in US that will start impacting the sales from 2QFY14 onwards. Company continues to focus on making niche launches and is making product filings accordingly. Currently, Wockhardt has 46 ANDAs awaiting approval and it intends to file 20 more products in FY14. For FY13, the company had launched 12 new products in the US.

  • During the quarter, EU, excluding France, declined by 5% YoY, however revenues from France declined by 43% YoY. Going forward even EU revenues are expected to get further impacted as UKMHRA had too put ban on the Wockhardt sales. Company is also looking forward to source the drugs from third party in order to export in the European markets.

  • India business (excluding Nutrition business) grew at a lower rate of 3%. Revenues were impacted due to disruptions caused in trade channels on back of new pricing policy and ban is sales of Spasmoproxyvon. As per the management, the new pricing policy will impact approx Rs 200 m (approx 2% of its domestic sales) on its topline that is approx.

  • RoW markets, excluding India, declined by 28% YoY for the quarter, as the orders from Russia got pushed to 2QFY14.

  • Operating margins declined by 5.0%% to 31.0% in 1QFY14 leading to a 12.8% YoY decline in operating profits. The company's increasing costs and lower growth impacted the overall margins.

  • Bottomline declines by 14.5% YoY during 1QFY14, on back of increase in overall expenses and poor topline growth. Even after excluding forex loss and income from discontinued operations PAT still declined by 10.5% YoY for the said period.

    Business and Financial updates

  • Import ban on Waluj facility - Company has appointed M/s. Lachman GMP Consultant INC USA to conduct a detailed review of the company's manufacturing sites and supervise implementation of Action Plan to meet FDA Requirements.

  • UK MHRA Actions on drugs manufactured at Waluj facility - On July 10, 2013 UK MHRA initiated a Precautionary recall of 16 product lines to UK Market. These products have been tested on importation in UK and certified by a Qualified Professional before releasing to the Market.

  • Inspection at Chikalthana facility - UK MHRA and USFDA both had inspected the this facility and have raised some 483 observations. While the company continues to manufacture the drugs, it has also given detailed response on the raised concerns by the regulatory authorities. In 2013, this facility contributed approx $ 230 m of sales (25% of FY13 revenues) and company's key product Toprol XL is also manufactured here.

  • Inspection at Shendara facility - UK MHRA has given the clearance however USFDA inspection is awaited in next few months

  • Update on Spasmoproxyvon ban in domestic market - The government of India has suspended the manufacture and sale of Dextroproxyphene and formulation containing the same. This brand was contributing approx Rs 1500 m to the company's domestic sales. The Company has challenged the suspension and the matter is subjudice.

  • Pending ANDAs - Company is awaiting approval of 50 ANDAs from US regulators.

  • Tax rate - 15% for FY14

  • Current Debt - Gross debt Rs 20 bn and cash R 12 bn

What to expect?
At the current price of Rs 440, the stock is trading at a price to earnings multiple of 3.3 times our estimated FY15 earnings.

Since some time, the company has been facing various headwinds on the international and domestic market front. On the back of events like, import ban, suspension of dextroprozyphene, impact of pricing policy etc will impact the company's sales and margins adversely. Though at the current valuations, the company seems to be attractive, we recommend investors avoid investing in this stock, owing to uncertainty about the resolution in its issues. Besides, as both USFDA and UK MHRA have now raised concerns over its another facility, any negative event can further impact the stock price adversely. We shall also update our FY16 financials by end of August.

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