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Wockhardt: Forex deals a blow
Oct 22, 2008

Performance summary
  • Revenues grow by 25% YoY during 3QCY08 (December ending fiscal) led by strong performance in the US, Europe and India.

  • EBDITA margins reduce marginally by 1.7% during 3QCY08 led by a rise in staff costs and other expenditure (as percentage of sales).

  • Bottomline tumbles by a considerable 41% YoY during the quarter, impacted by a steep rise in interest expenses and forex losses on foreign currency borrowing (forex gain in 3QCY07). If we exclude this impact during both the periods, then the bottomline registered a strong 21% YoY growth.



Financial performance: A snapshot

(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 7,381 9,235 25.1% 18,912 26,442 39.8%
Expenditure 5,572 7,127 27.9% 14,422 20,289 40.7%
Operating profit (EBDITA) 1,809 2,108 16.5% 4,490 6,153 37.0%
Operating profit margin (%) 24.5% 22.8%   23.7% 23.3%  
Other income 26 24   73 91  
Interest 361 468 29.6% 814 1,367 67.9%
Depreciation 196 269 37.2% 549 762 38.8%
Profit before tax 1,278 1,395 9.2% 3,200 4,115 28.6%
Extraordinary item - 11   - (164)  
Forex loss/(income) (93) 553   (332) 1,117  
Tax 288 242 -16.0% 762 713 -6.4%
Share of profit from associate - 29   - 68  
Profit after tax /(loss) 1,083 640 -40.9% 2,770 2,189 -21.0%
Net profit margin (%) 14.7% 6.9%   14.6% 8.3%  
No. of shares (m)         109.4  
Diluted earnings per share (Rs m)*         29.7  
P/E ratio (x)*         4.9  
* On a trailing 12-month basis

What has driven performance in 3QFY09?
  • Wockhardt’s domestic business registered a 11% YoY growth in 3QCY08, which was largely driven by the company’s focus on major high-end niche therapeutic areas, power brands and new product launches. The company has also been active on the product in-licensing front to keep up the pace of new product launches in the domestic market. In this regard, it signed an in-licensing agreement with Sinclair, UK to market a range of dermatology and dental products. Overall, the company launched 4 new products during the quarter.

    Revenue: Geographical mix

    (Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
    India 2,131 2,371 11.3% 5,987 6,734 12.5%
    Europe 4,330 4,789 10.6% 10,347 13,639 31.8%
    US 568 1,827 221.7% 1,571 4,834 207.7%
    Rest of the world (ROW) 352 248 -29.5% 1,007 1,235 22.6%
    Total 7,381 9,235 25.1% 18,912 26,442 39.8%

  • Revenues from the US business grew by a healthy 222% YoY during 3QCY08 led by new product launches, strengthening of the existing product portfolio, launch of Wockhardt’s paediatric business and growth from the acquired company Morton Grove. Excluding Morton Grove, Wockhardt’s revenues from the US still grew by an impressive 123% YoY, which is commendable. The company launched 3 products during the quarter (two of them being in the cough and cold segment) and received 4 new ANDA approvals out of which three were injectables, which is a niche area. Wockhardt now has 11 approvals in the sterile products space.

    Revenue: Business mix

    (Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
    Formulations 6,953 8,759 26.0% 17,696 25,306 43.0%
    Bulk 429 476 11.0% 1,216 1,136 -6.6%
    Total 7,382 9,235 25.1% 18,912 26,442 39.8%

  • Europe is at present the largest contributor to Wockhardt’s revenues (52%) and reported a 11% YoY growth in 3QCY08. This growth was led by the UK operations (up 20% YoY), which in turn was driven by the strong growth from its custom manufacturing, OTC and hospital businesses. Pinewood recorded a double-digit growth during the quarter after a difficult 1HCY08, which was driven by the hospital business and international operations with increased market share in Ireland. While the French business (Negma) grew steadily, it was nevertheless impacted by the structural changes in the industry. The German business was steady during the quarter with one new product launched.

  • Wockhardt’s operating margins during 3QCY08 reduced by 1.7% due to a rise in staff costs and other expenditure (as percentage of sales). However, the bottomline growth was significantly hampered (down 41% YoY) due to the sharp rise in interest costs and forex losses on foreign currency borrowings to the tune of Rs 553 m (forex gain of Rs 93 m in 3QCY07). If we exclude this impact during both the periods, then the bottomline registered a strong 21% YoY growth. Interest costs surged on the back of an increase in borrowings to fund various acquisitions. Wockhardt’s debt to equity ratio stood at 2.3 in FY08.

What to expect?
At the current price of Rs 146, the stock is trading at a multiple of 2.9 times our estimated CY10 earnings. In the domestic market, biopharmaceuticals and in-licensing will be the key growth drivers for Wockhardt going forward. As far as Europe is concerned, the company is looking to create value from its acquisitions namely Pinewood (Ireland) and Negma (France). Focus on the hospital segment and contract manufacturing is also part of Wockhardt’s strategy for the European market.

In the US market, besides stepping up the pace of product launches, the company's focus on niche and difficult to replicate products will be the key due to relatively lesser competition in these areas. As regards Morton Grove, now that Wockhardt has turned around the operations of this company, the emphasis will be on ensuring that Morton achieves margins at Wockhardt’s level in the next 24 to 36 months. Pricing pressure in the US and German markets, slower growth in the rest of the world markets and high interest costs would continue to remain a cause for concern going forward.

We will have to lower our earnings estimates for CY08 due to the considerable forex losses that the company incurred during the quarter and the nine month period and the fact that the interest costs were higher than what we had estimated. Thus, even though the stock is currently trading at very attractive valuations, we believe that there are better plays in the pharma space.

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