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Wockhardt Ltd. Rs 302.80

Recommendation Buy
Target Price Rs. 600

Market Data As On 28th October 2010

Total Equity Shares 10.94cr.
Equity Share Capital Rs 54.7cr
Market Capitalisation Rs 3,313cr
52 Wk H/L (Rs.) 344.95/115
Face Value Rs. 5
BSE Code 532300

Industry Overview

India's pharmaceutical industry is now the fourth largest in the world in terms of
volume and stands 13th in terms of value. According to data published by the
Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total
revenue of India's pharmaceuticals industry between September 2008 and
September 2009 was US$ 21.04 billion (Rs 97,000cr). Of this the domestic market
was worth US$ 12.26 billion or Rs 56,000 cr. The Indian pharmaceutical market
has grown at a Compounded Annual Growth Rate (CAGR) of 14% over the last
five years and is expected to touch $40 billion (Rs 1.8 lakh cr) by 2015 according
to global management consulting major McKinsey & Co. The company is present
in the following segments of the pharmaceutical industry:

Formulation:
India’s pharmaceutical market is highly fragmented with 10,000 firms controlling
70% of the market. The top ten firms account for the remaining 30%. Most of the
top formulation companies in India have plans to set up manufacturing base for
developed countries since registration processes are highly time-consuming and
complicated and they are the only ones with the required capital and market
reputation to do so. Formulation is a mechanical process and there is less scope
for growth or margin improvement. This is because the specific dosages of drugs
are fixed by the Government of India and companies have to adhere to the
existing norms.
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Bulk Drugs:
Bulk drugs or active pharmaceutical ingredients (API) are the raw materials for
manufacturing formulations or finished dosage forms of drugs. As the Indian
bulk drug industry is primarily export-oriented, its future prospects largely
hinges on its ability to tap the opportunity arising both in the regulated and
semi-regulated market. The opportunities in the regulated market
(outsourcing/supply of bulk drugs) are expected to emerge both for
manufacturing on-patent and off-patent drugs. This is in the wake of the
extensive cost-reduction initiatives of global pharmaceutical companies in a bid
to improve profitability and impending genericisation respectively.
There are two kinds of bulk drugs: synthetic and biopharmaceuticals. Synthetic
bulk drugs are made by the synthesis of organic compounds and there is limited
scope for innovation in this segment as most ailments have been tackled by
existing drugs. The biopharmaceutical segment, which manufactures drugs that
mimic natural molecules and interactions between them, has scope for
innovation and the market for these drugs is expected to grow rapidly over the
next few years. The drawback in this segment is that it is highly capital-intensive
and has high technology requirements.

Contract Research and Manufacturing Services (CRAMS):

Increasing costs of R&D, coupled with low productivity and poor bottom lines,
have forced major pharmaceutical companies worldwide to outsource part of
their research and manufacturing activities to low-cost countries, thereby saving
costs and time in the process. The US FDA has already approved over 100
manufacturing sites – more than in any country except the US. Among six offices
that the US FDA has overseas, two are located in India, in Delhi and Mumbai.
Contrary to popular belief, contract manufacturing yields decent margins with
most deals having been struck at 20-25% EBITDA levels. On-patent product
supplies are likely to attract higher margins due to the better pricing power
enjoyed by the Innovator MNC in its home market. India has a significant
advantage in this segment due to its high-quality US FDA-approved facilities,
excellent chemistry skills and IPR (Intellectual Property Rights) compliance
policies. This business is also scalable and as barriers to entry are high in the
form of quality standards, major cap-ex and lengthy approval processes, existing
players can capture a disproportionate share of the market.
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Company Overview
Wockhardt Ltd. is a global, pharmaceutical and biotechnology company that has
grown by leveraging two powerful trends impacting the world of medicine -
globalization and biotechnology. The company was founded by Habil
Khorakiwala in the early 1960s. Wockhardt's acquisitions include Wallis
Laboratory, UK (1998), Merind, India (1998), CP Pharmaceuticals, UK (2003),
Espharma GmbH, Germany (2004), Dumex India (2006), Pinewood Laboratory,
Ireland (2006) and Negma, France (2007).
The company has 14 manufacturing plants in India, US, Ireland and UK and
subsidiaries in US, UK, Ireland and France. The Company has built a strong
presence in healthcare encompassing pharmaceutical formulations, bulk actives,
biopharmaceuticals, vaccines and nutritional products. Besides formulations, the
Company is also amongst the world's leading manufacturers of active
pharmaceutical ingredients (APIs). Wockhardt is among the world’s top three
suppliers of Dextromethorphan, Vitamin B12 and Captopril. The company earns
approximately 69% of its revenues abroad and is active in the CRAMS or the
research outsourcing industry. It also has the highest filings for patents of any
Indian pharmaceutical company for the current year.

Key Highlights

Wockhardt has restructured the business verticals to penetrate the market and
provide better service and products to doctors and patients. In the last year, the
company has increased its field force by over 500 bringing the total to 2100 feet-
on-street. It has also added 70,000 doctors to the existing coverage of around
200,000 doctors. The company is looking to double the field force in two years.

In the US, the company has 87 ANDA approvals by the US FDA with many more
filings and approvals to come in the near future. It has 14 facilities worldwide
which are all approved either by the US FDA or the European Union regulatory
authorities.

Wockhardt is the only company after the originator, to develop a long-acting
insulin analogue – Glaritus. The US FDA has approved IND for Wosulin and
clinical trials are underway.

Wockhardt will establish a B2B model for penetration in emerging markets
where the company does not have a direct presence.

The debt restructuring of the company is nearly complete and will be closed
within this financial year. Almost 75% of the FCCB holders have been settled and
the rest will be taken care of in the coming months. The total debt of Rs 4000cr
will reduce over the next few quarters.
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Shareholding Pattern

As on 30th June, 2010

Actual Yearly Financials

(Rs. In Cr.) 2007-08 2008-09 2009-10(15 months)

Revenue 2699.2 3625.4 4501.4
Expenses 2013.9 2804.3 3648.7
EBDIT 685.1 821.1 852.7
Depreciation 78.5 113 148.1
EBIT 606.6 708.1 704.6
Interest 132.4 378 395.3
PBT 474.2 330 309.3
Tax -91.7 91.6 -167
Exceptional Items - 581 1294.9
Net Profit 382.5 -159.4 -1002.3
Equity 54 54 54
EPS (Rs.) 35.3 -14.76 -92.8
OPM (%) 25.38 22.65 18.94
NPM (%) 14.17 - -
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Actual Quarterly Financials

(Rs. In Cr.) Sept ‘09 Dec ‘09 Mar ‘10 June ‘10
Revenue 922.7 889.33 871.98 921.64
Expenses 770.1 755.48 713.98 741.45
EBDIT 182.33 133.85 158 180.19
Depreciation 29.73 30.96 26.47 29.42
EBIT 152.6 102.89 131.53 150.77
Interest 47.98 51.83 86.45 43.88
PBT 104.62 51.06 45.08 96.89
Tax 16.36 0 24.33 88.9
Exceptional
150.03 239.32 633.29 215.58
Items
Net Profit -57.87 -186.5 -55.88 -113.93
Equity 54.7 54.7 54.7 54.7
EPS (Rs.) - - - -
OPM (%) 19.71 15.05 18.12 19.55
NPM (%) - - - -

Peer Group Comparison

Wockhardt(15
(Rs. In Cr.) Cipla Dr. Reddy’s Torrent
months)
Market Capitalization 3313 28094 27829 4748
(as on 28th Oct 2010)
Revenue 4501.4 5624.91 7092.29 1916.04
EBITDA 852.7 1356.3 1480.52 420.78
Net Profit -1002.3 1082.5 351.47 231.20
Equity 54.7 160.5 84.42 42.31
EPS (Rs.) -83.78 13.79 27.64 34.30
OPM (%) 18.94 24.11 20.88 21.96
P/E - 25.38 59.55 16.36
Book Value per share -10.69 73.55 357.92 104.09
Figures for FY09-10
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Financial Forecast

(Rs. In Cr.) 2010-11 2011-12 2012-13

Revenue 4200 5000 6000
Expenses 3360 4000 4700
EBIDTA 840 1000 1200
Depreciation 130 150 200
EBIT 710 850 1100
Interest 240 250 300
PBT 470 600 800
Exceptional Items 250 - -
Tax - 120 240
Net Profit 220 480 560
Equity* 65.6 65.6 65.6
EPS (Rs.) 16.76 36.58 42.68
*We have considered Equity Capital post conversion of FCCBs

Valuation
Wockhardt has invested huge amount in Research and Development in last 6
years to address more profitable US & EU Markets. Historically, company’s
operations were EBITDA positive however due to Forex Losses on account of
Derivatives Exposure, the company made huge losses. Stock has under-
performed its peers in last couple of years due to heavy R&D expenses and Forex
Losses.

We believe Wockhardt has judiciously invested in R&D to strengthen its reach in

US & EU markets. Wockhardt has already provided Rs 1500cr in its books in last
2 years on account of Forex Losses. Management is optimistic that no further
provisions will have to be made and hence Bottom Line should improve sharply.

Currently, market cap of Large Cap Pharma stocks are nearly 5 times their
respective Sales. Whereas, Wockhardt’s Market cap is just 1 times its Sales. Hence
there is a Gap in valuation between Wockhardt and other Large Cap Pharma
Stocks. As the company addresses the issue of Debt and Forex Losses in the
coming few quarters, we feel that the above Gap will narrow down sharply.

We feel that Wockhardt shall command a PE Multiple of 17 times its 2011-12

expected EPS of RS.36 and shall quote at Rs.600.
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Daily Chart

Weekly Chart
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Technical Outlook:

Stock has shown trend reversal on Weekly Charts. It crossed its 200 Week
Moving Average (WMA) in last week of August 2010 and since then it is
trading above its 200WMA.

It has corrected from its Overbought territory on Daily charts and may test
its support of 280 (50 Day Moving Average)

We feel that it can go upto 450 in this momentum and shall not break its
support of 280.

RESEARCH TEAM

Dixit Doshi Apporv Jayavant Hardik Jain Bhavesh Premji

Research Analyst Research Analyst Director Head Research

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