FINANCE & STOCK ADVICE: Updates on Wockhardt

The Awaited News

Wockhardt is all set to seal its Corporate Debt Restructuring (CDR) on 26th June 2009. This is the most awaited news in Wockhardt as the future of the debts and thus its impact on the overall earnings of the company earnings depends on the way this CDR is packaged.

Financial Status

Wockhardt is sitting on a total debt of Rs.3100 crore of which rupee debt, borrowed from ICICI Bank, SBI, IDBI, BOI, ING and PNB stands at Rs.2000 crore. Forex debt is at Rs.1100 crore, taken mainly from ICICI Bank and some more foreign banks.

Reason For Debts

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.

As per the CDR worked out, the debt has been rescheduled to 7 years from 5 years. Interest rate has also been reworked at 8-9% compared to the 12.5% it is paying now. So the savings which would be made on account of the lowering of interest rates would be quite substantial.

There is also concern about the FCCBs worth $110 million which are due for redemption in October this year. These FCCBs are today trading at a huge discount. In all probability promoters will buy back the FCCBs and negotiations are on to go through with this too.

Promoters of the company, who own 74% stake, have already pledged 79.21% of this. They now plan to raise additional funds by selling their biotech and vet unit. It sold its German subsidiary Esparma on 18th June and raised Rs.120 crore. It had acquired this unit in May 2004 for Rs.49 crore, so this has proved to be a good deal. The cash raised would be infused back into the company. Promoters also plan to raise Rs.50 crore via equity.

The benchmark clause in the CDR, which could probably pave the way for others in India Inc would be the way it has managed to work its way out of the forex derivatives losses. For the financial year ended December 31, 2008, Wockhardt posted a Rs.581-crore mark-to-market loss on currency contracts. This is about the expired contracts, where losses have been realised, meaning the company now owes this money to the banks. On this issue, as per the CDR, banks are to be paid back by issuing zero coupon preference shares, which will mature in 2017. These shares will be converted into equity at a premium on redemption. But what is to be borne in mind here is that only 40% of the entire forex loss is part of the CDR, the rest is yet to be settled.

This working out of the CDR is good news and will help Wockhardt work its way out of the woods and once again concentrate all its attention back on running the business. It remains a sound company and is still the seventh largest pharma company by revenue.

Valuation Of The Company

Apart from this issue of debt, the company is not on thin ice. 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.3,100 crore, it can have a net enterprise value of Rs.6,900 crore, resulting in a value per share of around Rs.630.

Shareholder Interest

As we had assured earlier, the minority shareholders would tend to gain, as we did not see the promoters leaving the company in a lurch. It is already up today by over 4% at Rs.147 and continues to hold tremendous value and potential for those, who have a 12 months view on the stock. Now with the CDR underway, the fundamental of the stock looks brighter.

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Our role here could be summarized as :

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2. Make sure investor do not gt stuck into it.

3. Recommend to exit when the operator is about to leave it.which is the most important work or else the whole accumulated and deemed profit will be washed away along with part of investment and will remain stuck for long - long period.


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Updates on Wockhardt