Wockhardt: High on buys

Strong US sales drive growth in Q4 CY07.

Wockhardt, which has posted consolidated revenues of Rs 2,653 crore, has clocked reasonably good results for the December 2007 quarter, though the numbers are not comparable with those for the fourth quarter of CY07.

That's because the December quarter includes numbers of the US-based Morton Grove Pharma, acquired in October 2007, and also numbers for France-based Negma Lerads, which were consolidated in the September 2007 quarter.

The stock lost 1 per cent in a weak market on Wednesday though it was up more than 6 per cent on Thursday, as were some other pharma stocks. Over the past year, the counter has underperformed the market much like its peers.

Consolidated revenues from operations in the fourth quarter of CY07 rose nearly 45 per cent to Rs 762 crore, driven by sales in the US, which were up an impressive 275 per cent. Morton Grove's range of dermatology products did particularly well.

In Europe, it grew 27 per cent pushed along by sales of drugs for rheumatology and hypertension. However, domestic sales of bulk and formulation drugs were up just 10 per cent.

Lower spends on research and development and also on raw materials helped push up the operating profit margin (OPM) by 170 basis points to about 25 per cent though employee costs were higher. For perspective, Ranbaxy posted an improved OPM of 15.6 per cent.

Wockhardt's consolidated revenues for CY07 were up 36 per cent (again, not comparable) to Rs 2,653 crore.

Thanks to lower expenses on R&D, the OPM expanded by 100 basis points to 24.1 per cent. Higher interest and depreciation costs, however, ate into the net profit which rose just 27 per cent to Rs 382.5 crore.

The management hopes to grow the topline at about 20 per cent in CY08 and going ahead, operating margins should improve.

At the current price of Rs 361, the stock trades at 11.4 times estimated CY08 earnings and is attractively priced. The Rs 2,079 crore Sun Pharma trades at 17 times estimated FY09 earnings because of its superior margins.

State Bank of India: Margin pressure

State Bank of India has once again trimmed its benchmark prime lending rate (PLR) by 25 basis points to 12.75 per cent. On February 11, the bank had cut the PLR by 25 basis points.

The impact of the move has not been lost on shareholders; the concern that margins could be under further pressure has seen the stock shed 10 per cent in the last three weeks "" compared with a 2 per cent fall for the Sensex "" and 4 per cent in the last two days.

The cut in lending rates may boost volumes and consequently the loan book, which was growing at 26 per cent till December-end "" faster than the industry average of 22 per cent "", should continue to grow.

However, the cost of funds is yet to come off and the growth in term deposits continues to be strong "" it was about 32 per cent y-o-y at the end of December compared with 29 per cent at the end of September 2007. Unless deposits are re-priced downwards, there is bound to be pressure on the net interest margin.

Even otherwise, margins have been coming off the September quarter saw a lower margin at 2.84 per cent and for the nine months ended December, they were lower at 2.83 per cent compared with 2.9 per cent a year ago.  The Rs 17,000 crore rights issue in the ratio of 1:5 will help sustain loan growth as also meet capital adequacy requirements.  At the current price of Rs 2179, the stock trades at 2.3 times price to FY09 estimated book value.  At Rs 1144, ICICI Bank, which too has seen a slowdown in credit growth, trades at 2.5 times FY09 book value. HDFC Bank is far more expensive and, at Rs 1543, trades at just under 4 times FY09 book value.  HDFC Bank could outperform while the other two are likely to move in line with the market.