Wockhardt: The pain could continue

The company doesn’t seem to have sorted out its FCCB repayment problems as yet; the CDR may help.

It doesn’t seem like Wockhardt’s woes aren’t ending in a hurry. Rating agency Fitch has downgraded the company’s long term rating to BBB from A and maintained the rating on ‘rating watch negative’. The refinancing of the $140 million worth of FCCBs (including interest) by September 2009, remains a key concern, the agency notes, saying the downgrade reflects continued pressure on the company’s liquidity position. 

Wockhardt will not find it easy to come up with $140 million in the current credit environment but the firm seems to be making an effort through a corporate debt restructuring effort. There has also been some talk about a sale of a stake in Wockhardt Hospitals which would help because the firm’s debt is estimated at close to Rs 3,500 crore with the net debt to equity ratio at a high 180 per cent.

That’s probably why the stock rose in Tuesday’s trading session. However, it could be a while before there is some clarity on the debt is going to be repaid. In the meanwhile, since much of the borrowings are denominated in foreign currency there is some currency risk — the company has provided for mark-to-market losses of around 110 crore in 2008.

Although the equity markets could look up, it’s highly unlikely the bonds will converted — the current stock price at Rs 86 is way below the conversion price of Rs 486. Should Wockhardt place out shares at current prices, it could result in a fairly large dilution of the equity and hurt the earnings per share.

The company’s profits are under some pressure — a sharp rise in interest costs and provisions for mark-to market losses, resulted in a fall in net profits of nearly 24 per cent in the nine months to September 2008. That’s a pity because otherwise business has been fairly good both at home and abroad, driven by acquisitions. Consolidated revenues were up 40 per cent in the nine months to September 2008 while operating profits were up 33 per cent.