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Wockhardt: The right formulation!

Oct 19, 2005

Performance summary
Wockhardt has announced its results for the third quarter and nine months ended September 2005. Growth in the company’s international business, powered by strong performance of the formulations as well as the bulk drugs segment, was the key to the third quarter topline growth. While operating margins were under pressure during the quarter on the back of an increase in purchase of finished goods and R&D expenditure, strong topline growth coupled with a significant fall in the interest costs have aided the bottomline growth.

Consolidated numbers
(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Net sales 3,209 3,595 12.0% 9,045 10,462 15.7%
Expenditure 2,409 2,720 12.9% 6,975 8,026 15.1%
Operating profit (EBIDTA) 800 875 9.4% 2,070 2,436 17.7%
Operating profit margin (%) 24.9% 24.3%   22.9% 23.3%  
Other income - 29   6 153 2450.0%
Interest 71 41 -42.3% 102 146 43.1%
Depreciation 94 118 25.5% 269 328 21.9%
Profit before tax 635 745 17.3% 1,705 2,115 24.0%
Tax 77 95 23.4% 202 273 35.1%
Profit after tax/ (loss) 558 650 16.5% 1,503 1,842 22.6%
Net profit margin (%) 17.4% 18.1%   16.6% 17.6%  
No. of shares (m) 109.0 109.0   109.0 109.0  
Diluted earnings per share (Rs)*       18.4 22.5  
P/E ratio (x)         19.7  
(* 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 and a growing focus on biotechnology. With acquisitions in the international markets, the company has demonstrated its growing global ambitions. During 9mCY05, Wockhardt derived 60% of its revenues from non-India regions (60% in CY04). 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 driver performance in 3QCY05?
Biotech drives India: Despite a slower growth in domestic sales in 3QCY05 (6% YoY growth), the share of India to the total revenues increased from 36% in 2QCY05 to 40% in the third quarter. Wockhardt’s lifestyle portfolio continued to clock good growth due to its focus on the key areas of diabetology, biotech and nephrology. Its biopharmaceutical business grew by 27% YoY during the quarter. The 60% YoY growth in its diabetology portfolio was augmented by a robust growth in its key insulin brand – Wosulin, which captured 30% market share of all new prescriptions and continues to increase its share in the segment. The diabetology business now contributes 15% to the biotech portfolio.

Geographical mix
(Rs m) 3QCY04 3QCY05 Growth
India 1,359 1,446 6.4%
Europe 1,257 1,358 8.0%
US 322 454 41.0%
Rest of the world 271 337 24.4%
Total 3,209 3,595 12.0%
Business mix
  3QCY04 3QCY05 Growth
Formulations 2,805 3,123 11.3%
Bulk drugs 403 472 17.1%
Total 3,208 3,595 12.1%

US and ROW shine: The US operations continued to maintain a healthy growth during the third quarter, which was highlighted by the fact that revenues clocked an encouraging 41% YoY growth. This growth was mainly led by Wockhardt’s formulation and bulk drug businesses, which grew by 42% YoY and 38% YoY respectively during the quarter. Wockhardt also commenced supply of ‘Cefuroxime Axetil’ under its own label during the quarter. The company has made 10 ANDA filings so far during 9mCY05 and is planning to make a total of 15 filings in CY05. It is also looking to enter into strategic alliances with various established players in the US market, which is evident from the fact that the company entered into an alliance with Perrigo, which is among the largest OTC players in the US.

The Rest of the World (ROW) region grew by a strong 24% YoY during the quarter driven by healthy CIS business and biotech performances. During the quarter, the company received 5 new registrations for its biotech portfolio, taking the total number of international biotech registrations to 25.

Europe story: This region, which is the largest contributor to Wockhardt’s revenues, posted a relatively slower 8% YoY growth in revenues on account of pricing pressures witnessed in this region. However, the operations of the German company ‘Esparma’ acquired by Wockhardt was completely streamlined within the group owing to the fact that the process of transferring all the products to the UK was completed during the third quarter.

Bottomline picture: Operating margins reduced during the quarter by 60 basis points on account of an increase in purchase of finished goods and a significant rise in the R&D expenditure. Despite this, strong topline growth coupled with a drop in the interest costs ensured a 17% YoY growth in the bottomline.

Cost break-up
  3QCY04 3QCY05 9mCY04 9mCY05
(Increase)/decrease in stock 2.3% -1.9% 0.5% 0.6%
Raw material consumption 27.0% 26.1% 25.2% 24.9%
Purchase of finished goods 12.1% 15.7% 16.2% 15.6%
Staff cost 12.0% 12.4% 12.8% 12.7%
R&D expenditure 4.7% 5.6% 4.9% 5.0%
Other expenditure 16.9% 17.8% 17.5% 18.0%

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.

Quarterly trend
  1QCY04 2QCY04 3QCY04 4QCY04 1QCY05 2QCY05 3QCY05
Sales growth 78.1% 37.1% 11.3% 21.1% 6.5% 28.8% 12.0%
OPM 20.1% 23.9% 25.2% 21.6% 19.3% 25.4% 24.3%
Net profit growth 15.4% 17.3% 13.6% 25.6% -6.1% 54.7% 16.5%

What to expect?
At the current price of Rs 444, the stock is trading at a price to earnings multiple of 14.0 times our estimated CY07 earnings. Going forward, on the domestic business front, biotech and diabetology will continue to remain the key growth drivers for the company. 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. As far as the US markets are concerned, the company intends to focus on building capabilities to achieve a critical mass.

We had recommended a ‘Buy’ on the stock in March 2005 at Rs 363, with a target price of Rs 510. The stock has already breached our target price and has retreated back to the current levels. We believe that the stock price has factored in medium term growth prospects of the company and to that extent investors need to practice caution.

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