Wockhardt Does Well And Provides Healthy Guidance

Wockhardt had arranged an analyst meet on Tuesday, August 24, 2012 in Mumbai in the course of which it announced that the company has turned profitable after posting consecutive losses in 2008 and FY10. The management looks very optimistic and enthusiastic about the business. The company is focusing on complex research technologies and investing on creating intellectual properties. According to the management, it has lowered operating expenses by 1,420 basis points in the last 2.5 years, which now stand at 26.8 per cent of the total sales. This has resulted in doubling the EBITDA margins from 15 per cent to 35.2 per cent. The June 2012 quarter was also the tenth quarter of higher growth in EBTIDA margins.

Meanwhile, due to consistent investment in research and development, the contribution of its U.S. segment grew to 46 per cent in its revenue mix by June 2012. The company is planning to increase its focus on R&D. Its R&D investments were at 3.9 per cent of sales by 2008 which have grown to 5.3 per of sales by FY12. This research is for blockbuster products, niche and complex molecules, insulin, molecular antibodies and anti-infectives. The company now has 458 products sold worldwide, 164 granted global patents and a total of 1,585 patents so far. It also has 33 ANDAs pending approvals of which there are ten ‘first to file’ opportunities.

In FY13 it launched four products in the U.S., three in the U.K., four in Ireland and six in India. In the U.S. market it has improved its market share in key products and is witnessing a surge in the injectable business. With cash of Rs 937 crore and proceeds of the nutrition business’ divestment of Rs 1,280 crore as well as higher net profit, its debt to equity has come below 1x. The company has also reported a decline in its working capital as a percentage of sales while its working capital facilities have improved by 26 per cent.

As a part of its debt restricting scheme, the company has issued a large number of preference shares but it expects minimal equity dilution when these shares are due for conversion post 2015. In the U.K. it remains one of the top companies while in Ireland it has the largest i.e. 30 per cent market share in the generics segment. In France it has opted for cost-cutting measures and expects a new product launch in the next 1-2 years. The company has provided guidance for 20 per cent topline growth and about 31 per cent of EBITDA margins which are in line with FY12. The tax rate is expected to be 15-18 per cent and the capex is expected to be Rs 200-250 crore. 

Our Call

We already have a ‘buy’ call on the scrip and now we expect the EPS of the company to be in the range of Rs 102-107 for FY13. Our target price for the scrip is Rs 1,591 with a time horizon of two years, which is 26 per cent from its potential upside.