Tough market conditions and low valuations are the key hurdles for the Wockhardt management as it tries to tide over its debt problems.
The stock of pharmaceutical major Wockhardt has dropped 11 per cent since its announcement last Tuesday that it has approached the corporate debt restructuring (CDR) cell of ICICI Bank to tide over its debt hurdle. With the latest fall, the stock has lost over three quarters of its value from its highs in May 2008; it has significantly underperformed the BSE Sensex and BSE Healthcare indices since then.
Under a mountain of debt, Wockhardt has been forced to restructure its debt and will have to sell assets to fulfil its obligations. While the company has assets both in India and abroad, adverse market conditions and a tight liquidity situation mean that they have not been able to get buyers at good valuations.
On the other hand, as of December 31, 2008, according to Crisil, the company is estimated to have total debts of Rs 3,777 crore (net debt Rs 3,400 crore), over 60 per cent of which is to be repaid over the next two years. Undoubtedly, the situation is challenging.
What is due
While the company has reported an Rs 340 crore cash balance as on December 31, 2008, it has also taken an Rs 100 crore loan from the State Bank of India recently. Thus, the short term interest payments of about Rs 55 crore due this month might not be a problem. It is the FCCB repayments of Rs 1,324 crore ($140.6 million) due in September 2009 and Rs 1,048 crore due in 2010 that will strain the company’s finances.
Analysts believe that the debt burden has come about due to the string of acquisitions that the company has executed in the past two years. Of the Rs 2,000 crore it has paid for acquisitions (See table: One too many?), over 80 per cent has been due to European acquisitions–Negma Labs of France (Rs 1,000 crore) and Pinewood Labs of Ireland (Rs 663 crore). While the company has assets it can dispose off, what are the options it can exercise currently to repay its debt?
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On the block
The CDR, internal cash flows and redeemable preference shares of Rs 500 crore for which the company got shareholder approval in January this year are three options that Wockhardt hopes will solve its problems. It has also in the past indicated that it will sell “non-core assets” to repay its debts. However, given that $140.6 million worth of FCCBs will become repayable by September 2009, the company will very likely have to sell some of its assets (or raise funds from investors, existing or new), if it has to meet its obligation.
In this regard, if the company chooses to, it can bring in strategic investors by parting with a stake in either its European, American or Indian operations or by selling some of the companies all together.
| ROBUST THUS FAR | |||
| in Rs crore | CY07 | CY08E | CY09E |
| Net sales | 2,650.00 | 3,526.00 | 4,055.00 |
| % chg y-o-y | 53.00 | 33.10 | 15.00 |
| Operating profit | 640.00 | 811.00 | 933.00 |
| % chg y-o-y | 60.00 | 26.70 | 811.00 |
| Net profit | 390.00 | 181.00 | 203.00 |
| % chg y-o-y | 60.00 | -53.60 | 12.00 |
| Cash flow | 380.00 | 300.00 | - |
| P/E (x) | - | 4.60 | 4.10 |
| E: analyst estimates | |||
Analysts say that the domestic business, which has been growing at a CAGR of 17 per cent between 2003-07 covering fast growing segments such as diabetology, neutracitals, nephrology and cough and cold, could be an attractive option for multinational pharma players who want to expand their presence in India.
With about 10 brands in the Top 300 list and a market share of 2.3 per cent, the business will fetch a premium of about 1.5 times its CY08 estimated sales of about Rs 900 crore. This could yield the company upwards of Rs 1,300 crore.
While the foreign operations are growing, analysts believe it might not fetch the kind of premiums the domestic business can bring in, given the tight global market conditions.
Looking beyond
A lot of speculation is rife over how the promoters will act in personal capacity to help the company tide over the current crisis. Among this is the talk of promoters parting with a strategic stake in Wockhardt Hospitals, where they hold 100 per cent. Wockhardt Hospitals had made an unsuccessful attempt of a public offer in 2008, and if the IPO pricing (Rs 225 at lower price-band) is anything to go by, the company is valued at Rs 2,300 crore (market cap).
| BUSINESS VALUATION | |||
| in Rs crore | CY08 ^ | % of total | Valuation |
| India | 900 | 25.52 | 1,125 |
| Europe | 1,818 | 51.56 | 1,818 |
| US | 644 | 18.26 | 805 |
| ROW | 164 | 4.65 | 164 |
| TOTAL | 3,526 | - | 3,912 |
| ^ Estimated Revenue | |||
If the promoters do indeed sell their personal stake and considering that it could happen at a discount in current market conditions, they could get about Rs 1,725 crore. A minority stake sale of 49 per cent, which is more likely, could fetch them about Rs 800 crore. This along with other sources of funding (perhaps through a rights offer of Wockhardt Ltd, private placement), would be required to repay the current year’s debts.
Conclusion
On the business front, the growth in various geographies has been robust. The company is expected to close CY2008 with sales of Rs 3,500 crore and operating profits of Rs 810 crore, a growth of 33 per cent and 26 per cent respectively. The surprise element could be at the net profit level due to finance charges and the exchange fluctuations adjustments on its forex borrowings.
| ONE TOO MANY? | ||
| Year | Acquisition | Rs cr |
| 1998 | The Wallis Laboratory, UK | 37 |
| 2003 | CP Pharmaceuticals, UK | 82 |
| 2004 | Esparma, Germany | 50 |
| 2006 | Pinewood Labs, Ireland | 664 |
| 2006 | Dumex, India | - |
| 2007 | Negma Labs, France | 1,044 |
| 2007 | Morton Grove, US | 146 |
| Total | 2,023 | |
For the nine months ended September 2008 (9MCY08), financing costs (net) grew 68 per cent to Rs 137 crore. From a gain of Rs 33 crore in the previous period the company showed a loss of Rs 111 crore for 9MCY08 on the forex front. While analysts estimate forex losses to move up considerably for CY2008, more clarity will emerge on April 25 when the board meets to declare results and provide further details on the CDR package.
Meanwhile, the stock price is already reflecting most of the concerns. Investors, however, are advised caution as funding sources are drying up and those that are available come with stiff interest rates. If the company can sort out of the current mess it is in, it should prove to be a good investment over a two-year period.