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Wockhardt: Sustainability is the key

Oct 21, 2004

Performance summary
Domestic pharma company, Wockhardt, has declared its 3QCY04 and 9mCY04 results. In 3QCY04, the company's topline grew by 11.3% led by decent show of its European operations. The bottomline grew by 13.6%, basically led by expansion of operating margins by nearly 4%.

(Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
Net sales 2,852 3,175 11.3% 6,582 8,951 36.0%
Expenditure 2,244 2,375 5.8% 5,384 6,880 27.8%
Operating profit (EBDITA) 608 800 31.6% 1,198 2,071 72.9%
Operating profit margin (%) 21.3% 25.2%   18.2% 23.1%  
Other income 1 -   10 6 -40.0%
Interest (3) 71 -2467% 31 102 229.0%
Depreciation 82 94 14.6% 185 269 45.4%
Profit before tax 530 635 19.8% 992 1,706 72.0%
Tax 39 77 97.4% 69 203 194.2%
Profit after tax/(loss) 491 558 13.6% 923 1,503 62.8%
Net profit margin (%) 17.2% 17.6%   14.0% 16.8%  
No. of shares (m) 109.0 109.0   109.0 109.0  
Diluted earnings per share (Rs)*       11.3 18.4  
P/E ratio (x)         17.9  
(* 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 focused on the domestic market, but intense price competition and price regulations 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 3QCY04?
Acquisition led growth slowing down:  Growth in the topline has slowed down, compared to previous few quarters. The slow growth in the European business is due to higher base effect. Just to put things in perspective, the revenues from European business in June quarter last year were Rs 333 m, while the revenues in September quarter 2003 significantly increased to over Rs 1 bn, led by the acquisition of CP Pharma.

Going forward, the company's growth is likely to gain momentum in the US, where it recently launched 3 new products under the Wockhardt banner. Also, the capacity constraint, which was visible in June quarter, is easing out. The sales in the domestic market were up 11%. The field force re-structuring in the domestic market has helped company beat the industry growth rate. The 30 power brands of the company, which constitute 80% of the domestic revenue, continue to show robust growth of 18%. Also, the revenues from its biotech portfolio grew by 81% YoY. Wosulin, which has completed one year of its launch, increased its market share to about 6%-7% in domestic insulin market.

Geographical mix...
  3QCY03 3QCY04 Change
India 1,230 1,361 10.7%
Europe 1,061 1,246 17.4%
US 301 310 3.0%
Rest of World 259 259 0.0%
Total 2,851 3,176 11.4%

Margins peaking out:  The operating profit grew faster than the revenues. The basic reason for this is the increased contribution from the European markets, where margins are higher. Also, increased contribution from the high margin formulations business has also expanded operating margins. However, this margin profile is likely to be affected once competition picks up in the European markets. Also, company's recent entry into the US market on its own will affect the margins, as the cost of establishing sales and marketing network will take its toll, atleast in the near term.

Business mix...
  3QCY03 3QCY04 Change
Formulations 2,432 2,791 14.8%
Bulk Drug 419 385 -8.1%
Total 2,851 3,176 11.4%

Interest and tax provision blues:  Net profit grew by 13.6% in the quarter and by 63% in the first nine months of the current year. The lower growth in third quarter’s net profit compared to the operating profit was basically due to higher interest outgo and tax charges. The interest charges will increase further, owing to increased borrowings for funding acquisitions. The company has recently issued FCCB's (Foreign currency convertible bonds) worth US$ 110 m. Moreover, as the company’s contribution from the European operations pick up, the tax outgo could increase, as effective taxes are higher in those countries.

Over the last few quarters...


*1QCY04 sales includes acquisition of CP Pharma 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 over the last few quarters.

What to expect?
At Rs 325, the stock is trading at 18x annualized 9mCY04 earnings. Wockhardt, despite its past strong presence in the domestic market, has failed to capitalise on the same over the years. But with its recent focus on the international markets and some prudent acquisitions in Europe, growth prospects look 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 the margins front and further improvement from the current levels will be limited.


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