Wockhardt
Recommendation: Buy
CMP = Rs 416 (as of Monday)
Price target: Rs 552
Result highlights:
- Wockhardt's net sales increased by 68.6% to Rs 738.1 crore in Q3CY2007. The growth was achieved on the back of a 6.3% growth in the domestic business and a 121.1% growth in the international business. On a like-to-like basis (excluding the impact of the acquisitions made during the year), the growth stood at an approximate 9.0% during the quarter. The sales growth was above our estimates.
- Wockhardt's domestic sales grew by a subdued 6.3% to Rs 213.2 crore in the quarter. The growth was subdued due to the high base of Q3CY2006 because of the increased sales of its acute therapy brands on account of the spread of monsoon-related infectious diseases. Wockhardt is confident of accelerating the domestic growth in Q4CY2007 on the back of a steady performance of the power brands, the ramp-up of the oncology portfolio and the growing contribution from the in-licenced products in the dermatology space. We estimate Wockhardt's domestic business would grow by 17.0% in CY2007 and by 12.5% in CY2008.
- Wockhardt's European business almost doubled during the quarter to Rs 433.0 crore, driven by a healthy double-digit growth of 14-15% across the existing markets of the UK and Germany, and the consolidation of Pinewood Laboratories and the recently acquired Negma Laboratories.
- Wockhardt's reported operating profit margin (OPM) expanded by 230 basis points to 24.5% in Q3CY2007. This was driven by a 300-basis-point reduction in the other expenses and a 230-basis-point dip in the research and development (R&D) expenses. The sharp decline in each of these expenses was due to the deferral of certain R&D and selling/administrative expenses to Q4CY2007. The company reported an operating profit (OP) of Rs 180.9 crore, a growth of 86.3% year on year (yoy).
- Wockhardt's net profit stood at Rs 108.3 crore in the quarter, growing by 46.4% yoy. The profit growth was ahead of our estimates, despite a 50-fold increase in the interest expense (due to acquisitions), a 39% rise in the depreciation charge and a 360-basis-point increase in the tax incidence.
- At the current market price of Rs 416, the stock is available at 13.3x its CY2007E and 11.9x its CY2008E earnings, on a fully diluted basis. The valuations seem very attractive at these levels and should be viewed as a strong buying opportunity.
- I maintain Buy recommendation on the stock with a price target of Rs 552 with a time frame of 12 months.
Cadila Healthcare
Recommendation: Buy
CMP = Rs 300 (as of Monday)
Price target: Rs 425
Result highlights:
- Cadila Healthcare's (Cadila) total operating income (consolidated) grew by a healthy 28.4% year on year (yoy) to Rs 609.7 crore in Q2FY2008. The growth was driven by a 12.3% growth in the domestic business and a 64.0% growth in the exports. The sales growth was in line with our estimates. The consolidation of the recently made acquisitions also contributed to the overall growth. Excluding the impact of these acquisitions, the like-to-like growth stood at around 18.1%.
- Cadila's domestic formulation business grew by a subdued 6.6% to Rs316.3 crore in Q2FY2008. The growth was low during the quarter due to the high base of Q2FY2007, when the company had recorded strong sales due to the outbreak of monsoon-related diseases like malaria and chikungunya. However, as per the secondary sales data complied by ORG-IMS, Cadila's sales have been growing at 15%. The company believes that it is on track to achieve a 14-15% growth in this business in FY2008 and hence expects an acceleration in the growth in H2FY2008.
- Cadila's operating profit margin (OPM) shrank by 140 basis points to 21.6% in Q2FY2008. The contraction in the margin was largely due to a 49.9% rise in the staff cost due to the consolidation of Nikkho, which has a higher staff cost component. On the other hand, the gross margin improved by 190 basis points to 67.3%, once again due to the consolidation of Nikkho, which enjoys a gross margin of up to 80% as it operates in the branded product space in Brazil. Consequently, Cadila's operating profit grew by 20.8% to Rs 131.7 crore in Q2FY2008.
- Despite a doubling of the interest expenses (due to the acquisitions), the pre-exceptional net profit grew by 17.0% to Rs 82.5 crore. The net profit was affected by a foreign exchange (forex) loss of Rs 2.2 crore recorded during the quarter and was marginally above our estimates. The earnings for the quarter stood at Rs 6.6 per share.
- At the current market price of Rs 300, the company is trading at 13.4x its FY2008 and 11.4x its FY2009 estimated earnings.
- With all the growth drivers in place, I maintain Buy recommendation on Cadila with a price target of Rs 425 for a time frame of 12 months.
