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Mr Habil Khorakiwala, Chairman.

Kumar Shankar Roy

Investors with an appetite for risk can add the stock of Wockhardt, a unique drug formulations player drawing over 50 per cent revenues from Europe, to their portfolio with a two-year perspective. Wockhardt booked a 53 per cent rise in revenues on the back of a 60 per cent growth in net profits in 2007, riding high on inorganic growth through a host of acquisitions in the past two years (including Negma Lerads in France and Morton Grove in US).

The year 2008 will reflect organic growth, as Wockhardt seems well placed to benefit from synergies leading to cost rationalisation and an enhanced product basket spread over both specialised generics and biotech drugs. In this light, the management guidance of 30-35 per cent sales growth does not appear over-stretched if execution risks are mitigated at Wockhardt, which is aiming for revenues of $1 billion by 2009.

We reiterate our ‘buy’ on Wockhardt (read Investment World dated January 6, 2008) even though the stock has undergone considerable correction, in line with broad markets. The likelihood of redemption of outstanding $108 million FCCBs (due September 2009) or 8-9 per cent equity dilution at Rs 486/share, if converted, has also been a factor in the stock’s decline.

However, at the current market price of Rs 267, the stock trades at a modest valuation of seven times its likely 2008 earnings per share. Wockhardt’s leveraged balance-sheet (debt-to-equity ratio of over two times) indicates that odds are in favour for further equity-dilative measures to be adopted in future. Recent reports of significant foreign currency losses sustained by the company have been denied. Wockhardt’s net debt (excluding FCCBs) is denominated in dollar/euro total $592 million. Presently, the company hedged against currency movements for its 2008 and 2009 loan payments. The company has a policy of hedging 25 per cent of forex loans (including interest cost) that are due in the next three years against adverse currency movements.

Given Wockhardt’s record in turning around acquired businesses, growing presence in US injectables and speciality generic market (niche) and sustainable growth business in the UK, Germany, France and Ireland, the company’s earning prospects seem tidy. Recent trends in quarterly results indicate a firmer grip. Wockhardt’s volume-based Indian business has grown at over 15 per cent last year driven by formulations, Dumex acquisition (having nutritional brands Protinex and Farex) and in-licensed products. Further, the re-introduction of recombinant insulin (Wosulin) has also helped.

After adjusting for inorganic contribution, Wockhardt’s sales for the full year have grown by 14 per cent on a like-to-like basis amidst overseas acquisitions and pressure on the generics business worldwide. The company, till recently, did not have major presence in the US generic market. With the acquisition in the US of Morton Grove, though the buy-out maybe margin-depletive/neutral in the short-term, it will definitely play out well in future like Negma Lerads (in France). Wockhardt also has access to 31 products through Morton that will help boost market share.

In the US, Wockhardt received 13 generic drug approvals and has applied for 25 more; the product pipeline which consists of complex products, may give the company a foothold in less competitive drugs. The company recognises drug-filing costs on receipt of approval. Development costs being written off at one go may hurt short term profitability; but may help margins as benefits from the launch begin to flow in.

Wockhardt is the largest Indian pharma company in Europe, having clocked an annual turnover of 240 million euros in 2007. With all four businesses doubling growth rates, Wockhardt has taken on a cost rationalisation move, whereby manufacturing of some products have been moved into India while others have been shifted to Ireland. The full benefits would be realised in next 12-18 months and may help profitability.

Lastly, on the biopharmaceutical front, Wockhardt is targeting a $10 billion generic and analogue insulin market by 2014 with four products already off-patent in key markets such as the US, EU and Japan. The company has filed for a new drug application for Insulin in the US while the EU filing is expected shortly. If the regulatory pathways evolve as expected, Wockhardt might launch biogeneric products in EU as early as 2009.

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