 "Wockhardt: Street says USFDA concerns overdone")
Through the past week, the Wockhardt stock lost 19 per cent, after the US Food and Drug Administration (FDA) issued observations on the injectables unit of the company’s Waluj (Aurangabad) manufacturing facility. The observations, made last month, relate to various USFDA concerns.
While the company has responded to the observations, analysts expect the USFDA to respond in three to four weeks.
Though the Street has reacted negatively and the stock has been falling through the past week, analysts believe the sharp correction was overdone, given the observations were a first step, and not as drastic as a warning letter or an import alert. Also, the injectables unit for which the observations were issued accounts for barely 2.5 per cent of the company’s overall sales and wouldn’t hit the company’s exports portfolio to the US.
Most analysts have maintained their estimates and believe the recent correction has factored in most negatives. In a recent report, Anshuman Gupta and Prashant Nair of Citi Research say barring an import alert (worst case), the 13 per cent fall in the stock through the last two days factors in the worst.
The recent correction has made valuations attractive and offers a good entry point to investors, given the company’s strong growth prospects, analysts say. Bank of America Merrill Lynch analysts Arvind Bothra and S Arun say the company is trading at 11.8 times its FY14 estimates and 10.2 times the FY15 estimates — a steep 30 per cent discount to the sector. “This is unwarranted, given the improved financial health (debt-free by FY15) and likely earnings beat on the back of stronger US growth,” they say.
The USFDA observations relate to the injectables section alone; the company’s oral block in the same facility didn’t attract any comment, limiting the revenue impact (overall, this facility accounts for 20-25 per cent of US sales). So far, the company’s track record has been impressive; it has never received a warning letter or a product recall order.
Most analysts aren’t too concerned about the USFDA observations, as most of the company’s profitable and large products are not manufactured in this facility. Key products, accounting for 35 per cent of the company's US revenues, are manufactured at its Chikalthana (Aurangabad) plant.
While the revenue impact is minimal, risk of the action spreading remains. Gupta and Nair say though the injectables block at the export-oriented unit doesn’t contribute much to US revenues, it is likely the USFDA action could extend to other blocks in the same complex (in the past, this has been the case with various companies). They identify three scenarios that vary from the best case (the facility is cleared) to an import alert (which means the company would have to discontinue exports from this facility to the US). Macquarie Research’s Abhishek Singhal says if the entire US injectables portfolio is withdrawn (due to an import alert), this could hit the FY14 earnings before interest, tax, depreciation and amortisation (Ebitda) estimate by 3.5 per cent. If the issue aggravates, product approvals from the injectables unit are also unlikely.
Wockhardt is expected to see a strong performance in the quarter ended March. Led by its US business, the company’s revenues are expected to grow 18 per cent year-on-year. The US business, which accounts for more than half of Wockhardt’s consolidated revenues, is expected to post annual growth of 42 per cent. Finquest Research’s Anand Bagaria believes growth in the US business is likely to result from a rise in market share of its niche products and new launches. The product mix should help the company record an Ebitda margin of 37.3 per cent, against 38 per cent in the quarter ended December. The company is expected to close FY13 with growth of 23 per cent, at Rs 5,677 crore.
Analysts expect Wockhardt’s earnings to grow 10-15 per cent annually in FY14 and FY15.
While the company has responded to the observations, analysts expect the USFDA to respond in three to four weeks.
Though the Street has reacted negatively and the stock has been falling through the past week, analysts believe the sharp correction was overdone, given the observations were a first step, and not as drastic as a warning letter or an import alert. Also, the injectables unit for which the observations were issued accounts for barely 2.5 per cent of the company’s overall sales and wouldn’t hit the company’s exports portfolio to the US.
Most analysts have maintained their estimates and believe the recent correction has factored in most negatives. In a recent report, Anshuman Gupta and Prashant Nair of Citi Research say barring an import alert (worst case), the 13 per cent fall in the stock through the last two days factors in the worst.
The recent correction has made valuations attractive and offers a good entry point to investors, given the company’s strong growth prospects, analysts say. Bank of America Merrill Lynch analysts Arvind Bothra and S Arun say the company is trading at 11.8 times its FY14 estimates and 10.2 times the FY15 estimates — a steep 30 per cent discount to the sector. “This is unwarranted, given the improved financial health (debt-free by FY15) and likely earnings beat on the back of stronger US growth,” they say.
The USFDA observations relate to the injectables section alone; the company’s oral block in the same facility didn’t attract any comment, limiting the revenue impact (overall, this facility accounts for 20-25 per cent of US sales). So far, the company’s track record has been impressive; it has never received a warning letter or a product recall order.
Most analysts aren’t too concerned about the USFDA observations, as most of the company’s profitable and large products are not manufactured in this facility. Key products, accounting for 35 per cent of the company's US revenues, are manufactured at its Chikalthana (Aurangabad) plant.
While the revenue impact is minimal, risk of the action spreading remains. Gupta and Nair say though the injectables block at the export-oriented unit doesn’t contribute much to US revenues, it is likely the USFDA action could extend to other blocks in the same complex (in the past, this has been the case with various companies). They identify three scenarios that vary from the best case (the facility is cleared) to an import alert (which means the company would have to discontinue exports from this facility to the US). Macquarie Research’s Abhishek Singhal says if the entire US injectables portfolio is withdrawn (due to an import alert), this could hit the FY14 earnings before interest, tax, depreciation and amortisation (Ebitda) estimate by 3.5 per cent. If the issue aggravates, product approvals from the injectables unit are also unlikely.
Wockhardt is expected to see a strong performance in the quarter ended March. Led by its US business, the company’s revenues are expected to grow 18 per cent year-on-year. The US business, which accounts for more than half of Wockhardt’s consolidated revenues, is expected to post annual growth of 42 per cent. Finquest Research’s Anand Bagaria believes growth in the US business is likely to result from a rise in market share of its niche products and new launches. The product mix should help the company record an Ebitda margin of 37.3 per cent, against 38 per cent in the quarter ended December. The company is expected to close FY13 with growth of 23 per cent, at Rs 5,677 crore.
Analysts expect Wockhardt’s earnings to grow 10-15 per cent annually in FY14 and FY15.