Wockhardt: Invest with caution

After the US regulator's warning letters and the scrip's plunge, no one is quite sure of what lies ahead

Investors don’t like uncertainty. Despite, given the market volatility, flocking to the defensives such as fast moving consumer goods and pharmaceutical counters, they have been selective and dumped stocks on negative news flow.

Wockhardt, once an investors’ darling and having risen 235 per cent in the past financial year (2012–2013), is an example. It has seen investor exodus since the US Food and Drug Administration (FDA) raised an import alert for both its oral and injectables units at the company’s export-oriented plant at Waluj, Aurangabad. In a more recent development, the FDA issued another warning letter on manufacturing issues with regard to the same plant.

A warning letter means the company has not complied with the ‘good manufacturing practices’ it is supposed to follow. Wockhardt has pegged the revenue loss at $100 million from the import alert and the subsequent warning letter.

The stock — it tanked another 10 per cent in trade on Monday to Rs 516 levels — has been an under-performer, slumping 72 per cent from a high of Rs 1,848 on May 16. Over the same period, there’s been a 0.4 per cent fall in the S&P BSE Healthcare index and a 2.7 per cent fall in the S&P BSE Sensex.

The road ahead
So, what should you do? Does the fall merit an investment or should one choose to stay away? Analysts have a cautious view on the stock, as things stand.

“There are chances that the import alert might be widened, which could be an overhang for the company. However, if it gets clearance for the other facilities, there is nothing much to worry about,” said an analyst from a local brokerage.

Says Sarabjit Kour Nangra, vice-president (research), Angel Broking: “Some companies in the Indian pharma space, like Ranbaxy, have gone through a similar thing in the past. So, as far as the industry is concerned, this is nothing new. As regards the company, this is a setback as Wockhardt had just emerged from a corporate debt restructuring programme. Given the FDA development, their growth plans will get impacted to a certain extent.”

Adding: “The stock has fallen sharply and the valuations seem attractive. However, one needs an investment horizon of over two years in case one wishes to invest at the current levels.”

Ashu Madan, chief executive officer, Religare Securities, maintains a cautious view. “I think one should watch how the developments unfold, rather than investing at the current levels,” he said. “The stock has seen a good run up in the past and been an outperformer. So, I feel the top has already been made and, going ahead, it will under-perform. Once such issues crop, the stock is neither a good trading bet or a good investment option, since the fundamentals can get impacted.  All put together, one can avoid this counter for now.”

Sriram Rathi of Anand Rathi has a positive outlook and suggests Wockhardt, to reduce the impact, is looking at a site-transfer option, as well as separating the oral and injectables units -- no issues were raised on the former and resolving the import alert would take at least a year.

“We lower our FY14 and FY15 revenue estimates 10.2 per cent and 11.9 per cent, respectively, and adjusted profit after tax (PAT) 19.4 per cent and 20 per cent. The greater drop in PAT estimates is due to the likelihood of margins declining 200-300 basis points from less revenue to absorb fixed costs and consultant charges to resolve the FDA issues. We maintain a 'buy' recommendation, with a revised target of Rs 1,672,” he says in a report this May.