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Wockhardt: US gives impetus to growth

Dec 5, 2012

Wockhardt has announced its 2QFY13 results. The company has reported 29% YoY growth in sales and a 477% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 29% YoY during the quarter led by growth in its international business.
  • Operating margins improve dramatically by 11.6% leading to a 85% YoY growth in operating profits.
  • Bottomline increases by 477% YoY during 2QFY13, due to exceptional gain in 2QFY13, vs. exceptional loss in 2QFY12.

Financial performance: A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 10,450 13,470 28.9% 21,637 26,890 24.3%
Expenditure 7,650 8,300 8.5% 15,295 17,300 13.1%
Operating profit (EBDITA) 2,800 5,170 84.6% 6,343 9,590 51.2%
EBDITA margin (%) 26.8% 38.4%   29.3% 35.7%  
Other income 30 170 466.7% 82 260 218.6%
Interest (net) 830 60 -92.8% 1,450 710 -51.0%
Depreciation 260 310 19.2% 660 590 -10.6%
Profit before tax 1,740 4,970 185.6% 4,314 8,550 98.2%
Exceptional (loss) (680) 800   (681) 730  
Tax 210 860 309.5% 459 1,100 139.4%
Profit after tax/(loss) 850 4,910 477.6% 3,174 8,180 157.7%
Net profit margin (%) 8.1% 36.5%   14.7% 30.4%  
No. of shares (m)         108.0  
Diluted earnings per share (Rs)         58.0  
Price to earnings ratio (x)*         30.5  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • Wockhardt's topline grew by 29% YoY during the quarter led by growth in its international business. Excluding the nutrition business (the company sold this business in the last fiscal) growth was at 38%.

  • US witnessed growth of 22% in constant currency terms and 47% in Re terms. Currently, the US contributes around 48% to the total business as against 31% and 44% in FY11 and FY12 respectively. The higher contribution is due to the launch of Toprol and Para IV drugs under low competition; however Toprol remains the key product for the company. Currently, Toprol contributes around 20% to total US sales which is US$ 100 m per year. The company remains confident of retaining the market share, even with Dr Reddy's entering and there being some price erosion. Other than Toprol, the company is selling Comtan and Stalevo as authorized generics. We believe these two products to contribute around US$ 30m during their exclusivity. Wockhardt has 30 pending ANDAs and has guided for 15 new filings in the current fiscal.

  • EU, excluding France, witnessed growth of 24% YoY. However, revenues from France declined by 36% YoY. The UK business grew by 26% YoY. On constant currency terms growth was at 7% YoY. India business (excluding Nutrition business) grew at a low rate of 4% YoY due to restructuring of the field force during the quarter. Emerging markets grew by 92% YoY for the quarter.

  • Operating margins improved dramatically by 11.6% to 38.4% in 2QFY13 leading to a 85% YoY growth in operating profits. This was largely due to one time inventory impact, and slight improvement in the other segments. It is pertinent to note that since the company's forex position is open, the depreciation of the rupee too has played a role in margin improvement. The operating costs also include expenses of Rs 480 m towards product development; this cost is included in the respective heads of the operating expenses.

  • Bottomline increased by 477% YoY during 2QFY13, due to exceptional gain in 2QFY13, vs. exceptional loss in 2QFY12. The company generated profit of Rs 11 bn from the sale of its Nutrition business, however, the same has been adjusted towards losses in various segments. The breakup of the same is as below :

    Exceptional Gain Working
    (Rs m)  
    Revenues from sell of Nutrition business 11,870
    Intangible assets related to R&D 4,370
    Write off goodwill in French business Negma 6,210
    Impairment in Associate Co. 380
    Miscallaneous 110
    Balance exceptional gain 800

What to expect?
At the current price of Rs 1,759, the stock is trading at a price to earnings multiple of 12 times our estimated FY15 earnings. Wockhardt will be exiting from the CDR plan in the current fiscal, as company has been able to meet its obligations ahead of time. The company's balance sheet has improved drastically on one hand and its business has also seen considerable improvement leading to higher margins. Wockhardt is looking to enter into niche segments and intends to spend higher on R&D expenses, all of which should drive future growth. However, concerns exist in terms of the company's high dependence on Toprol and its thin pipeline in the US. We now have a HOLD rating on the stock.

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