At a time when equities, currencies and commodities are losing ground, Wockhardt’s stock has delivered amazing returns which are praiseworthy given that, not long ago, the company was in the doldrums. On Thursday, the stock scaled to its all-time high of Rs 825 on the Bombay Stock Exchange before closing at Rs 787.4. Since the beginning of 2012, it has gained 180 per cent, including 18 per cent over the past three days.
While these gains are driven by improving top line growth and profitability, this week’s share price movement is also on account of a robust performance in the March quarter. Led by strong growth in US business, the revenues rose 32 per cent year-on-year to Rs 1,241.39 crore. Operating profit margins improved to 34.6 per cent from the previous quarter’s 31.1 per cent. For the full year, too, margins expanded about 700 basis points to 31.2 per cent, whereas sales increased 23 per cent to Rs 4,613.8 crore. Net loss reported in the March quarter was due to exceptional items like impairment of goodwill and debt restructuring.
Wockhardt’s performance improved on account of a better portfolio mix supported by lower cost of raw materials. Niche products, such as generics of Toprol XL, an anti-hypertensive launched in the US during July 2010, contributed $150 million to FY12 revenues. Nasal spray Flonase also contributed substantially to sales. This helped the US account for 41 per cent of its FY12 revenues, up from 29 per cent in the previous year. Notably, its share in revenues is expected to continue rising, given the strong product pipeline. Higher sales from generics of Comtan and Stalevo, to combat Parkinson’s disease, are expected to spur US sales.
Wockhardt has come out stronger after going through a rough patch. After a series of aggressive global acquisitions in 2006 and 2007 (some of which didn’t work well) for a total of Rs 2,000 crore, resulting in a rise in debt, foreign exchange losses added to its problems. These resulted in the company defaulting on its foreign currency convertible loans.
Along with a corporate debt restructuring, Wockhardt resorted to a series of asset sales to bring down its debt burden — its net debt to equity stood at 1.9 times at the end of FY12 from 3.6 a year ago. Improving operational performance, along with plans to divest the nutritional division for Rs 1,280 crore, should help lower debt levels further. Macquire expects the net debt to equity to come down to 0.3 times in FY14.
The market seems to be betting on this sharp debt reduction and benefits from launches in the US. However, while sustaining high top line growth may not be easy, if it is able to meet analysts’ expectations of 40-50 per cent profit growth in FY13, it should reflect positively on its stock. Nevertheless, PE valuations of nine times FY12 adjusted earnings is inexpensive, and lower than 15-17 times for its larger peers.