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Wockhardt: Swift growth

Oct 31, 2002

Wockhardt has posted another quarter of strong growth in revenues and improvement in operating margins. For 3QFY02, the company’s revenues were up 19%, while the bottomline grew by 22%. The growth in topline was much higher compared to the preceding quarter (2QFY03) in which the company clocked a 14% rise in topline. While Wockhardt’s domestic business grew by 17%, exports grew at a stellar rate of 56%. Following this strong growth in exports, contribution to total revenues increased to 30%. The improvement in operating margins came from reduction in inventory levels.

(Rs m)3QFY023QFY03Change9mHFY029mHFY03Change
Sales1,7242,05319.1% 4,715 5,643 19.7%
Other Income 19 3 -84.2% 31 9 -71.0%
Expenditure1,3551,60118.2% 3,795 4,481 18.1%
Operating Profit (EBDIT) 36945222.5%9201,16226.3%
Operating Profit Margin (%)21.4%22.0% 19.5%20.6% 
Interest 38 18 -52.6% 116 56 -51.7%
Depreciation 30 35 16.7% 87 100 14.9%
Profit before Tax 320 402 25.6% 748 1,015 35.7%
Tax 24 4275.0% 51 109 113.7%
Profit after Tax/(Loss)29636021.6%69790630.0%
Net profit margin (%)17.2%17.5% 14.8%16.1% 
No. of Shares (m)36.336.3 36.336.3 
Diluted Earnings per share*32.639.7 38.449.9 
P/E (at current price) 11.2  8.9 
*(annualised)      

Exports
Wockhardt’s export strategy is quite different from other domestic players. While most of its peers have chosen the ANDA (Abbreviated new drug application) route, the company is targeting to create giant manufacturing capacities in difficult to manufacture bulk drugs. As a result, of the total exports, 3 bulk drugs (analgesic bulk -DMP, anti-cold bulk active-DPP, and Vitamin B12) currently contribute about 65% of revenues and the rest is accounted by formulation export to unregulated markets. During the quarter, sales of bulk drugs (active pharmaceutical ingredients- APIs) rose by 25%, while growth in revenues from formulation was 70%.

Biotech
Wockhardt initiated the biotech products (bio-generics) business in the global arena. It’s first two biotech products i.e, Hepatitis B vaccine and Erythropoetin are market leaders in their respective segments. Going forward, bio-generic and generics exports to US are expected to push growth to the higher trajectory. Wockhardt is expecting one new product introduction every year from its biotech division. That said competition is likely to get stiffer in the domestic market. For example, both Cipla and Ranbaxy are planning to introduce Erthyopoitein. Shanta Biotech is targeting to produce human insulin. Considering this, it is unlikely that the company would be able to maintain its pricing power.

Generics
Revenues from generic formulations saw a sharp decline. Obviously, the company has not yet managed to get its act together as far as this segment is concerned. However, the company is approaching this market in a rather cautious way and is evident from lack of investment in any marketing infrastructure abroad. It intends to grow through the partnership route with companies filing ANDA in the US and Europe. A strategy that is similar to that of Cipla’s. Considering Wockhardt’s insignificant presence in this segment and the inherently uncertain nature of the business, it is prudent not to build up any revenue stream at this point of time.

At the current market price of Rs 445, the stock is trading at a P/E multiple of 9x 9mFY02 annualised earnings. The company’s growth strategy seems to be working well. The biotech division of the company is capable of giving positive surprises, especially the human insulin strategy. However, the export basket is too concentrated and skewed towards older generation bulk drugs. Though the generic business of the company is likely to reduce concentration, this business would take time to take off.

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