Stock Review: WOCKHARDT

Wockhardt's sale of its nutrition business to Danone will fetch the drug maker much-needed cash, allowing it to pay up foreign currency convertible bondholders and reduce debt. The Mumbai-based company, which is saddled with debts totalling . 3,700 crore, will receive about . 1,300 crore from the sale. So its debt-equity ratio should halve to less than 3 from 6 a year ago.

This financial cushion comes on top of its recent corporate debt restructuring deal, which has already won it a reprieve of some two to three years before it starts repaying debt.

The company, the pioneer in diabetes therapeutic segment, is present in multiple therapeutic segments and contract research and manufacturing. It has also entered into in-licensing deals, where it helps foreign partners market their drugs in India.

Geographically, Europe accounts for 44% of its revenues, India 23%, the US 27% and rest of the world 6%.

The company wants to increase its presence in US, a market where lot of its drugs were approved last year.

Due to a strong growth in US from back-toback drug launches, the company turned around in the second half of the last financial year after making losses for three consecutive years. In the coming years, the cash flows from improved profitability and the extended period for debt repayment will put Wockhardt in a very comfortable position. In FY11,

Wockhardt's net sales were . 3,750 crore and net profit . 90.5 crore. The contribution of nutrition division to the consolidated earnings is estimated to be around 10%.

Given this, the sale of this business will reduce its earnings in the coming quarters marginally. Additionally, the interest outgo would also come down substantially, which in FY11 was three times the net profit.

In the March quarter, its earning per share (EPS) was . 15. On a conservative basis, annualised EPS would be . 54 in FY12, assuming no growth, no reduction in interest payment and a 10% earnings loss.

Assuming this, at the current market price of . 440, Wockhardt is trading at a forward price-to-earnings multiple of 8.1 as compared to peers such as Lupin, Dr Reddy's and Sun Pharma, which are all trading around a multiple of 20.