Wockhardt – stock analysis – looks good at this price

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.

Update

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.

Disclosure

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

 

Related links

Wockhardt – Investor Communication

Wockhardt: Debt Debacle To Stock Rocket – Business World

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Comments

    • says

      I think not Uma. The core business needs some serious repair. The US FDA has hit them with a sledgehammer. It will take a while. More importantly, credibility needs to go up for valuations to higher even if business improves. So, first business improvement and then repaired credibility can help them.

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