Wockhardt: In the pink

Growth in European operations drives Wockhardt's earnings

The Wockhardt stock didn't move up much after the results for the December quarter were announced, as the market had already factored a better performance from the company.

The company has reported a 25.6 per cent growth in its consolidated profit after tax to Rs 63.2 crore in the last quarter, helped by a 21 per cent growth in sales.

A key highlight of the last quarter was the sharp growth in its European operations "" revenues in this market have expanded 29.1 per cent to Rs 157.4 crore.

In fact, the size of its European operations has overtaken its domestic market, to emerge as the largest revenue source for the company. One factor responsible for the fast growth of this market have been the recent turnaround of its German acquisition esparma Gmbh.

This buyout has enabled Wockhardt to expand its sales of medications for segments such as urology, neurology and diabetology in the booming continental market for generics.

Meanwhile, domestic sales also expanded 10.1 per cent to Rs 116.4 crore helped by improved sales for Wosulin (recombinant insulin) and Wepox (medication for the nephrology segment).

Like other pharma companies, Wockhardt has seen its staff costs jump 24.2 per cent to Rs 55.5 crore in the December quarter but a larger turnover has helped to neutralise this rise.

As a result, consolidated operating profit has grown 24.3 per cent to Rs 74.1 crore and operating profit margins have also improved 60 basis points to 21.6 per cent.

Going forward, the company is planning to expand its focus on the domestic insulin market through a number of product launches. Also its emphasis on expanding in emerging markets like South Africa and Mexico should help it to grow its exports turnover aggressively, over the next few quarters.

Colgate

Who would have thought an FMCG stock would return over 100 per cent within a year? Colgate Palmolive has achieved that rare feat, hitting a 52-week high of Rs 215 in Tuesday's session.

In late June 2004, the stock had reached an intra-day low of Rs 102, resulting in a difference of almost 110 per cent between its 52-week high and low, the highest among established FMCG plays.

There have been a numbers of triggers for Colgate's rerating. While the toothpaste market recorded volume growth last year after a long gap, Colgate did better, posting market share gains. In the nine months till December 2004, the industry grew volumes by 4.8 per cent, while Colgate's volumes grew 7.5 per cent.

Besides, the introduction of VAT is expected to benefit the company. According to analysts, the company would save on sales tax, which if passed on to customers could trigger further volume growth.

In any case, Colgate is expected to make considerable savings because of a (partial) relocation in its production of toothpaste to its new plant in Baddi, Himachal Pradesh. Excise and income tax savings from the plant could add about 30 per cent to the company's bottomline in FY06.

Further, with most players having cut advertising spend last year, Colgate has been able to bring down this expense by 2.5 per cent of sales to 14.4 per cent in the nine months till December 2004.

As a result, its operating profit grew 25 per cent during the period. Excluding ad expenses, the growth in operating profit would have been less than five per cent.

However, much of its volume growth is on account of the low-priced Cibaca brand - this is the reason revenues grew just 2.3 per cent in the nine-month period, although volumes grew 7.5 per cent. That's one reason why, at 18 times estimated FY06 earnings, the stock is richly valued.

GDP growth""manufacturing slowdown

The advance estimates of GDP growth in 2004-05 indicate that growth in the second half of the year will accelerate from the level reached in the second quarter.

That's because the GDP growth estimate for the full year is 6.9 per cent, compared to 6.6 per cent growth in the second quarter. What's more, GDP growth shot up to 11 per cent in the third quarter of last year from 8.8 per cent in Q2, before falling back to 8.4 per cent in Q4.

It's likely, therefore, that the government reckons that the acceleration in growth will occur in the last quarter of this year, as it'll be very difficult to show a higher growth rate on Q3's higher base.

Which are the sectors in which the improvement is supposed to happen? Agriculture is one of them, with annual growth estimated at 1.1 per cent, compared to Q2's -0.8 per cent growth.

The other sectors are mining; construction; financing, insurance, real estate and business services; and community, social and personal services.

The sectors in which the government expects rates of growth to decline from Q2 levels are manufacturing; electricity, gas and water supply; and trade, hotels, transport and communication.

Given the phenomenal rates of agricultural growth in Q3 and Q4 last year, the improvement in the agricultural growth rate seems difficult. But construction and social services should benefit from a lower base in the second half of last year.

From the point of view of corporate India and the market, however, perhaps the most significant prediction is that manufacturing will slow down from the 9.3 per cent growth rate notched up in Q2.

With contributions by Amriteshwar Mathur and Mobis Philipose