WOCKHARDT - NOT YET ON THE DEATH BED

Wockhardt, India’s seventh largest pharma company by revenue is witnessing a huge debt burden. It has a debt equity ratio of 2.3:1 as at 30/09/08. The total debt of the company is at Rs.3,400 crore while its net worth is at Rs.1,490 crore. The company has decided to approach the Corporate Debt Restructuring (CDR) cell through its lead banker – ICICI Bank.

The reason for the mounting debt has been the overseas acquisitions made by the company in the last two years. It had acquired Ireland based Pinewood Lab for $150 million, then the France based Negma Lab for $265 million and US based Morton Grove Pharma for US$ 38 million. This has constrained the fund raising ability of the company.

Even FCCB of $110 million is becoming due for redemption on 25/09/2008 with liability of $142.54 million, with interest calculated thereon. These FCCBs will not get converted, as its conversion price is Rs.486 per share. Promoters of the company, who own 74% stake have already pledged 79.21% of this and hence unable to do much on their own.

It has been reported in some sections of the media that the company is trying to offload part of its stake in Wockhardt Hospital, a company which could not succeed in raising Rs.650 crore through its IPO in Feb 08. Wockhardt does not have any stake in Wockhardt Hospital, as 82% of its stake is held by Dartmour Holdings P.Ltd, a closely held company of Khorakiwala family, with H.F Khorakiwala holding 97.56% in it. 9.09% each, is held by Carol Info Services Ltd, a listed arm and H.F Khorakiwala. Even this company is reported to be having a debt of over Rs.500 crore. Maybe, by diverting major stake in this company, Khorakiwalas can realize a good amount, which can be brought in by them in Wockhardt to repay part of the debt.

If we look at the financials of Wockhardt, it is quite strong with a tiny equity base of Rs.54.70 crore. For the year ending Dec 07’, the total income of the company, on consolidated basis, was placed at Rs.2665 crore with a PAT of Rs.386 crore, resulting in an EPS of Rs.35, with a net worth of Rs.1,275 crore as at 31/12/07, giving a book value of Rs.116 per share.

Even for the first 9 months ending 30/09/08, the total income of the company, on consolidated basis, was at Rs.2,652 crore with a PAT of Rs.219 crore. This has resulted in net worth rising to Rs.1,495 crore as at 30/09/08.

If we take a look at the financials of the company, it becomes evident that it is not as precariously perched as being made out to be by various sections of the media. The company is estimated to have an annual sales of Rs.3,500 crore of which, Rs.2,200 crore may come from Europe and USA, based on the past data. Generally, on a global parameter, an established pharma company like Wockhardt, gets valued at 3 times of its topline. This means, it can get a valuation close to Rs.10,000 crore and if we deduct the debt of Rs.3,400 crore, it can have a net enterprise value of Rs.6,600 crore, resulting in a value per share of Rs.600.

The promoters having already pledged its 79% stake may divest its majority or total stake in Wockhardt Hospital, to raise between Rs.750 crore to Rs.1000 crore, which in turn, can be used by them to meet FCCB redemption in September 09’. They can either bring in fund as unsecured loan or by issuing shares on a preferential basis. If the promoters opt to raise money, using the preferential mode, they can raise their stake beyond 80%, which will trigger an open offer. Alternatively, if promoters opt to divest some of its overseas subsidiaries, it can bring back the company on it own feet. Lastly, if part stake sale is contemplated, it could also trigger an open offer.

In all the cases, the minority shareholders would tend to gain, as promoters will not leave the company in a lurch. Share at Rs.75 holds tremendous value and potential for those, who have a 12 months view on the stock. Any positive news of the promoters being able to mobilize funds would change the fundamentals of the stock.

By SP Tulsian