I am sharing a quick note on Wockhardt today. A detailed note will follow.
Wockhardt is one of the largest pharma companies in India. It ranks in the top pharma companies in India in terms of net profit.
Please read a later article I wrote – Why did I sell Wockhardt? after you read this article.
Also read about the warning letter issued to Wockhardt by the US FDA after you read this article.
Wockhardt – Before
- Acquired companies abroad in 2006-07
- Took on too much debt
- Defaulted on foreign currency convertible bonds (FCCB) problems, had forex losses and got into problems with the banks and investors.
- Basically, they were hit by the perfect storm.
- They entered Corporate Debt Restructuring (CDR) to reduce debt levels.
- Institutional investors exited.
- Sell-side (broking house) reports vanished. Research coverage stopped as it became a pariah.
Wockhardt – After
- Operationally, the company started doing better and continues to perform well.
- They sold its nutrition business to Danone for Rs. 1280 crore.
- They started paying back debt. Today, they have brought down debt to much lower levels
- They have cleaned up the balance sheet (considered impairment of goodwill and intangible assets, expensed off carried forward R&D items in the Profit and Loss statement, in the Sep 2012 quarter)
- As per the latest management call held a few days back it is exiting CDR in a few weeks.
- Research coverage on Wockhardt is increasing again.
- Mutual funds have started entering the stock.
- It is still under-owned by institutions.
Wockhardt – My observations
- It has already run up by a huge percentage. On 21 Feb 2012, it closed at around Rs. 482. One year later, yesterday, the stock closed at Rs. 1916. That is a multiple of 4 times!
- Today, market capitalization of this stock is around Rs. 21,000 crore.
- The earnings for the last 3 quarters of FY13 or 9 months FY13 (9MFY13) are Rs. 1244 crore.
- If I assume, that they close FY13 with Rs. 1500 cr of net profit (conservatively) it implies a price to earnings multiple (P/E) of around 14 times.
- Do a quick check on other majors like Sun Pharma, Lupin, Dr. Reddy’s or Cipla.
- You will see that major pharma companies trade at around 18-20 times earnings or higher usually.
- There is a significant valuation gap on P/E ratio basis even today.
- With greater amount of fund-buying, it could move higher.
- If I give a discount of 20% on P/E ratio considering it has a slightly troubled past, there is still a 15% P/E re-rating upside.
- Sales grew by 30% in the first nine months of FY13 as compared to previous period.
- EBITDA margin improved to 36.5% as compared to 27.7%.
- PAT should grow in-line or more, with reducing debt load as interest payments reduce.
- It looks attractive to me at the current prices.
I am invested in Wockhardt since Rs. 1027 levels. I have bought more progressively till Rs. 1753. I continue to hold this stock. Please read the disclaimer.
P.S. I had studied this at Rs. 400 levels but held back from investing because I did not have clarity on a couple of questions which I thought to be pertinent. I later entered because I got my answers. Missed the initial jump, but that’s alright.
Its better to follow a process and lose some potential profits as compared to losing your shirt in an investment.
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Wockhardt – Feb 2013 – Investor Presentation