Are Wockhardt's concerns overdone?

Import ban could hurt revenues by Rs 550 crore, but analysts are positive as net debt is down

After hammering the stock last week, investors have clearly had a re-think on Wockhardt after its fourth quarter numbers. The shares moved up four per cent on Monday, recouping some of last week's losses, when the stock fell 25 per cent on news of an import alert on its Waluj facility. Most analysts believe the concerns were overdone and the company would be able to firewall the injectible unit, which is where the problem is.

As the unit does not produce medicines for the US market, Wockhardt might be able to resolve the production issues at the facility or segregate it from other units. Select analysts believe the problem pertains only to one unit in the Waluj facility, but since the US regulator, the FDA, does not segregate different units in one facility, all of it has come under a ban. Abhishek Singhal and Kumar Saurabh of Macquarie Research believe while the FDA action is a negative surprise, causing near-term pressure, the correction in the Wockhardt stock is overdone.

The fourth quarter performance strengthens this view. During the quarter, sales grew 20 per cent and profit after tax was Rs 335 crore, compared to a loss of Rs 192 crore in the March 2012 quarter. Even sequentially, its sales have grown nearly four per cent, much ahead of market estimates. During the quarter, operating margin expanded 220 basis points to 36.7 per cent year-on-year. Apart from strong operating metrics, the fall in overall debt has come as a big positive. The company has made a repayment of Rs 1,310 crore, bringing down gross debt to Rs 1,657 crore. After factoring in Rs 1,096 crore of cash, the net debt is only Rs 560 crore, says Deepak Malik of Emkay.

Despite its fourth quarter performance, the import alert will impact Wockhardt's revenues and earnings in FY14. Sales will take a hit of Rs 550 crore ($100 million), as all products (oral and injectibles) will be blocked from entering the US market till the manufacturing issues are resolved. While the company is evaluating an alternative site for the other products, how long it takes to resolve the situation is key. Anshuman Gupta and Prashant Nair of Citi Research have cut their FY14 and FY15 revenue estimates by 12 per cent and 14 per cent, respectively, as they see sales being hit by discontinuation of approved products and the delay in new approvals from the Waluj unit. It has also cut Wockhardt's earnings target by 26 per cent for FY14 and 28 per cent for FY15.