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Wockhardt: US brings it back to black
Aug 19, 2011

Wockhardt has announced its first quarter results for 2011-12 (1QFY12). The company has reported 14.3% YoY growth in sales and a profit of Rs 1,940 m against a loss of Rs 1,162 m in 1QFY11. Here is our analysis of the results.

Performance summary
  • Net sales grow by 14.3% YoY led by growth in its US business.
  • Operating margins (EBITDA) rise 9.9% (as percentage of sales) to 29.5% due to a fall in raw material and staff costs.
  • The company reports net profits of Rs 1,939 m as against a net loss of Rs 1,162 m in 1QFY11. This is due to the exceptional loss in 1QFY11. On excluding the same, net profits nearly double.

Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 9,216 10,532 14.3%
Expenditure 7,415 7,424 0.1%
Operating profit (EBIDTA) 1,802 3,108 72.5%
EBDITA margin (%) 19.6% 29.5%  
Other income 37 54 48.2%
Depreciation 293 380 29.5%
Interest 644 585 -9.3%
Profit before tax 901 2,198 144.0%
Tax 89 216 142.7%
Exceptional Gain / (Loss) (2,156) -  
Forex Gain / (Loss) (206) 38  
Minority Interest (24) (5)  
Profit after tax/(loss) (1,162) 1,939  
Net profit margin (%) (0) 0  
No. of shares (m) 109 109  
Diluted earnings per share (Rs) (11) 18  
Price to earnings ratio (x)*   25  
*On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Wockhardt clocked a 14.3% YoY growth in sales during 1QFY12. This was led by a phenomenal growth of 131% YoY in the US market. The domestic market also showed a healthy growth of 24% YoY and the market share increased 2.03% within India. Sales for the European region have given mixed signals. The UK sales grew by 17% YoY whereas other markets (esp. France) de-grew substantially reducing the overall sales growth to just 14.3% YoY.
  • Operating margins rose 9.9% (990 basis points) due to a fall in raw material and staff costs as a % of sales. This according to us is due to de-growth in the French market where the profit margins were very small.
  • Wockhardt reported net profits of Rs 1,939 m as against a net loss of Rs 1,162 m in 1QFY11. Wockhardt had taken a loss of Rs 2,156 m in the form of exceptional items in 1QFY11. Adjusting for exceptional items, the net profits nearly doubled when compared to the same quarter last year.
  • Wockhardt's current debt level is around Rs 35 bn making its debt to equity ratio exorbitantly high. The company restructured its debt obligation with secured lenders and is now expected to pay its debt starting 2015.
  • Recently the company announced the sale of its nutritional business to Danone. If this deal goes through (subject to FCCB holders approval), Wockhardt will get cash to the tune of Rs 13 bn. It is expected that the company will use the cash proceeds to repay a part of its debt.

What to expect?
At the current price of Rs 385, the stock is trading at a multiple of 7.2 times our estimated FY14 earnings. In the domestic market, Wockhardt has created a strong presence by expanding its reach across India. The company has shown a phenomenal growth in the US market in the last few quarters and is expected to show a good growth ahead. However, the European market is facing problems with key markets de-growing substantially.

Since the last couple of quarters, the management has stopped discussing its business with the investor and analyst community. Though the company seems to be coming out of the woods, because the uncertainty regarding its high debt levels has not been completely eliminated, we advise investors to remain cautious while investing in the stock.

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