Buy Wockhardt - Strong Q1 Numbers Indicate Worst Is Over

Pharmaceutical and biotech major from Mumbai, Wockhardt has reported a whopping 95 per cent rise in net profit to Rs 378 crore. On the back of this solid revenue push in the U.S. markets, the company has reported a 35 per cent jump in the revenues to Rs 1,426 crore. The EBITDA margins are also flying high from 30 per cent in the corresponding quarter last fiscal to 35 per cent in the June quarter of this fiscal.

This one time debt-ridden company has successfully lowered its debt to equity ratio below 1x. The current gross debt is Rs 3,400 crore which is also expected to reduce significantly with the help of the Rs 900 crore cash on the balance-sheet and Rs 1,280 crore which the company received after divesting its nutrition business to Danone. After hitting its all-time low at Rs 67.50 in March 2009, the stock has now surged to over Rs 1,100. On a YTD basis the shares have given an amazing 380 per cent returns, making it one of the multibagger scrips in the Healthcare sector.

The U.S. business, which contributes 46 per cent to the topline, grew by 78 per cent to Rs 653 crore. The company has seen strong traction in the USA and this is the eighth quarter which has shown sequential growth. In the U.S. market the company launched an authorized generic named LEC (brand Stalevo – anti-Parkinson’s drug of Novartis) which has captured 70 per cent market share. Besides, it has also launched three new products.

The European business that contributes about 26 per cent posted sales of Rs 312 crore, showing a YoY growth of 21 per cent during the quarter. The company has witnessed growth in the UK and Ireland though there has been a decline in revenues from France. In the UK and Ireland the company launched a few products of which Atorvastatin was a Day 1 launch that helped to clock a good growth rate.

The growth in India was 10 per cent, which is below the market growth rate. The emerging markets during this quarter grew by 30 per cent on a YoY basis. Overall the growth momentum has continued in Wockhardt. The company has been successfully reducing the debt and after the repayment of further debts there will be expansion of the net profit margins. The fiscal FY12 had been good for the company when the company reported 23 per cent jump in the topline. By  March 31, 2012 the company had filed 13 ANDAs, taking the total number of filings to 115. It had a total of 36 ANDAs awaiting approvals of which 10 are the FTFs.

The decline in its business in France has been due to the higher generic competition for its drug ART50. To fight the same the company has reduced the work force and restructured the manufacturing operations. However, we believe that the competition will remain furious for its patented drug. This, however, will have negligible impact as we believe that only 2 per cent of its revenues come from France and the same will be overshadowed due to the higher growth rates in the U.S. and Europe. Besides, the higher EBITDA will also will compensate for the France revenues. 

Table 1 Wockhardt June Quarter 

The June quarter has been the 10^th sequential quarter showing growth in the EBITDA margins. The lower debt to equity ratio also indicates that the worst is behind and Wockhardt is on a path of recovery. The company, despite its financial hurdles in the earlier years, has never cut its R&D expenses. According to the FY11 annual report, it had 1,369 patents of which 110 were granted. The higher patents mean it will have a cutting edge in the pharma market in the future.

The investors are also highly bullish on the company which is reflected in its shareholding pattern. In the past three quarters the FIIs have increased their shareholding in the company by fourfold to 5.16 per cent.

Despite the surge in the share price, we expect further price appreciation in its stock price. The scrip is currently trading at a price to earnings multiple of 22x of its annualized EPS of Rs 48. We also give a defensive price target of Rs 1,320 which will give 22 per cent returns from its CMP.