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Wockhardt: Improvement continues
Dec 9, 2011

Wockhardt has announced its second quarter results for 2011-12 (2QFY12). The company has reported 18.1% YoY growth in sales and a profit of Rs 1,275 m this quarter as against a loss of Rs 975 m in 2QFY11. Here is our analysis of the results.

Performance summary
  • Net sales grow by 18.1% YoY led by strong operating performance from the US and domestic business.
  • Operating margins (EBITDA) rise 570 bps (5.7%) to 29.1% due to a fall in raw material and staff costs.
  • The company reports net profits of Rs 1,275 m this quarter as against a net loss of Rs 975 m in 2QFY11. The poor performance in 2QFY11 was due to the exceptional loss. On excluding the exceptional items and forex losses, net profits increase by 90%.

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
Net sales 9,401 11,105 18.1% 18,617 21,637 16.2%
Expenditure 7,203 7,871 9.3% 14,616 15,295 4.6%
Operating profit (EBIDTA) 2,198 3,234 47.1% 4,001 6,342 58.5%
EBDITA margin (%) 23.4% 29.1%   21.5% 29.3%  
Other income 35 28 -21.0% 71 82 15.0%
Depreciation 300 280 -6.4% 594 660 11.2%
Interest 565 398 -29.5% 1,209 983 -18.7%
Profit before tax 1,369 2,583 88.7% 2,270 4,781 110.7%
Tax 113 244 117.0% 202 460 128.3%
Exceptional Gain / (Loss) (2,020) (681)   (4,176) (681)  
Forex (Gain) / Loss 211 430   6 467  
Minority Interest - 47   (16) 42  
Profit after tax/(loss) (975) 1,275   (2,130) 3,215  
Net profit margin (%) -10.4% 11.5%   -11.4% 14.9%  
No. of shares (m) 109 109   109 109  
Diluted earnings per share (Rs) (9) 12   (19) 29  
Price to earnings ratio (x)*   7        
*On trailing 12 month basis

What has driven performance in 2QFY12?
  • Wockhardt's sales grew by 18.1% YoY for the quarter with growth coming from phenomenal increase in the US and the domestic market. US business grew by 84% YoY led by growth from new launches in the last quarter. This growth was also supported by its existing products which grew nearly 49% YoY. Wockhardt added 4 ANDA approvals from the US FDA in this quarter, totaling to 84 approvals. The domestic business (~22% of sales) also showed a healthy growth of 13% YoY, which was much better than other competitors. The domestic market share stood at 2.04%. Sales for the European region were weak with UK sales growing by 3.6% YoY only.

  • Operating margins rose 570 bps to 29.1% due to a fall in raw material and staff costs. This was due to trimming of operations at Negma in France where the profit margins were very small.

  • The company reported net profits of Rs 1,275 m this quarter as against a net loss of Rs 975 m in 2QFY11. The poor performance in 2QFY11 was due to the exceptional loss. Excluding the exceptional items and forex losses, net profits increased by 90% when compared to the same quarter last year.

  • Wockhardt's current debt level is around Rs 37.9 bn making its debt to equity ratio at 2.6 times. Though it is quite high, it is lower than that in FY11. The company restructured its debt obligation with secured lenders and is now expected to pay its debt starting 2015.

  • On the sale of its nutritional business to Danone, the court has directed Wockhardt to clear the FCCB holders' installments and has given a go-ahead to divest the nutritional business. The payment of Rs 850 m, Rs 300 m and Rs 1,000 m is to be done by the end of December 2011, January 2012 and March 2012 respectively.

What to expect?
At the current price of Rs 376, the stock is trading at a multiple of 7.1 times our estimated FY14 earnings. In the domestic market, Wockhardt has created a strong presence by expanding its reach across India. The company has shown a phenomenal growth in the US market in the last few quarters and is expected to show a good growth ahead. However, the European market is facing problems with key markets de-growing substantially.

Since the last couple of quarters, the management has stopped discussing its business with the investor and analyst community. The company seems to be coming out of the woods but is trading at a huge discount to its peers. This is due to its high debt and the problems with FCCB repayments. Till these get resolved, we advise investors to remain cautious while investing in the stock.

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