Stock Review: WOCKHARDT

 

 

After three painful years, Wockhardt showed a turnaround in its financial performance in FY11. The company has posted a profit in the last two quarters, and there seems to be no looking back for it. The stock is a good value buy for a long term investor. The planned sale of its nutrition division will help in re-rating of the stock.

BUSINESS

Wockhardt is a generic pharma player having a presence in formulations, nutritional products and bulk drugs. Over two-thirds of its revenues come from international markets.

FINANCIALS

An aggressive acquisition strategy saw the company's debt balloon to over 3,100 crore in 2008. This is a mix of secured and unsecured loans, and included foreign currency convertible bonds or FCCBs, where the lenders have the option of converting the bonds into equity. A global slowdown and wrong bets on currency derivatives in 2007-08 spoilt Wockhardt's party. Since then the company has undergone a major financial and operational restructuring. Of late its financials have shown a dramatic improvement. In the March 2011 quarter, net sales were at 939 crore with operating margin of 27%. Not many peers enjoy such a high margin. Its net profit for the quarter was 160 crore, and operating cash flows for FY11 were strongly positive.

INVESTMENT RATIONALE


The company had slipped into the red due to its financial problems. But its operational side is going strong. Under recent corporate debt restructuring measures, the company has been given a few more years to payback its debt to the secured lenders, who account for almost 90% of its debt.

However, it owes around 440 crore to FCCB holders, who have filed a winding-up petition against Wockhardt. The company has deposited 115 crore or 25% of the debt amount with the court as proof that the company can raise enough cash if required. A decision in its favour would give the company sufficient time to pay back this debt, while an unfavourable verdict would require the company to pay back the debt immediately. After selling its various other businesses earlier, the company is now looking to sell its nutrition division valued at around 1,200 crore. If the deal goes through, Wockhardt will be able to bring down its debt drastically.

VALUATIONS

In the March quarter, Wockhardt's earning per share was 15. On a conservative basis, assuming no growth, it would be 60 in FY12. Given this, it is trading at a forward price-to-earning multiple of seven. Compared to peers such as Lupin, Dr Reddy's and Sun Pharma which are all trading around a multiple of 20, Wockhardt looks highly undervalued.