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The curious case of Wockhardt

Jun 14, 2011

From doing quite well in the early 2000s, Wockhardt's financial health quickly deteriorated post 2008. In this article, we will discuss the issues faced by Wockhardt that almost led to the fall of the company. We will also discuss on how the company managed the crisis and the risks of investing in the company having large acquisitions on the back of rising debt and venturing into exotic derivative products.

About the company

Wockhardt is a generic pharma player having its presence in formulations, nutritional products and bulk drugs. The company has its manufacturing units in India, Europe and the US with more than 65% of its revenues coming from outside India. It has also formed partnerships with many leading global pharma companies for providing formulations.

The growth period and ballooning debt

The company saw phenomenal growth in the last decade. For instance, the sales and operating profit went 5 times from 2001 to 2008. The company paid regular dividends and the stock price also went 4 times to Rs 400 in the same period. But this growth had come with a huge increase in total debt. Between 2003 and 2008, Wockhardt acquired seven companies internationally spending about Rs 22 bn. To name a few, it acquired Negma Laboratories in Europe, CP Pharmaceuticals in UK and Esparma & Pinewood Laboratories in Germany. The company seemed ready for the next level of growth. But it was important to note that, its debt had ballooned 14 times from Rs 3 bn to Rs 42 bn in that duration.

Debt burden and complex cross-currency trades led the fall

Wockhardt raised debt from domestic (mostly banks) as well as international markets. This debt was raised as a mix of secured loans and unsecured loans including the FCCBs (foreign currency convertible bonds). FCCBs are a special type of foreign loans that can later be converted to shares at the predetermined price. Apart from these loans; the company had entered into complex currency option contracts and structured products with banks. This was with a motive to hedge the currency exposure and to bring down its interest cost on foreign loans. But, in the year 2008, talks of a huge loss on these complex contracts surfaced. The company first denied it and later as a damage control exercise came out with a press release explaining the losses as a onetime event. Reality was that troubles had just begun for Wockhardt.

In the next 3 years (2008-2011), the company took a hit of around Rs 20 bn as exceptional items till 2011 on account of these complex transactions. These 3 years wiped off the entire profit of the last 10 years. That's not it. Banks stopped its funding and the company's operations were affected. It defaulted on loan repayments to banks. Some of these banks initiated negotiation proceedings abroad to reach a settlement. On the stock performance, the price decreased by more than 80% in one year. Habil Khorakiwala resigned as managing director and was replaced by his youngest son.

On hindsight...

At its peak in 2008 the stock price traded at the price to earnings multiple of 25 times. The company was growing fast but its debt grew even faster. The management was aggressive in acquisitions. All this was slowly damaging the balance sheet. Plus, the company took speculative bets through complex currency trades and structured products. In 2008, forex loses triggered bad times for the company and the next 2 years or so was a very difficult period indeed.

In the next article, we will further discuss the ways by which the company managed to resolve some of its issues. We will also discuss the current problems that it still faces and the path ahead for the company.

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2 Responses to "The curious case of Wockhardt"

XYZ

Jun 15, 2011

When successive articles will come

Like 

bhavik

Jun 14, 2011

A very nice article...
And true that Debt was the biggest reason of the fall of wock!!!

Like 
  
Equitymaster requests your view! Post a comment on "The curious case of Wockhardt". Click here!

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