Wockhardt - Q2FY13 performance well ahead of our estimates... - Finquest

Q2FY13 performance well ahead of our estimates... sale of lower EBDITA margin business (Nutrition Business) helps to boast margins

Q2FY13 revenue came in at Rs 13.47 bn, in line with our estimate of Rs 13.55 bn. But divestment of lower margin nutrition business and favorable stock adjustments during the quarter helped margin expansion. EBIDTA came in at Rs 5.17 bn, 15% ahead of our estimate of Rs 4.51 bn. The adjusted PAT (pre exceptional) grew 3% Q-o-Q to Rs 4.13 bn. Considering buoyant performance during 1HFY13, we revise upward our revenue estimates for FY13 and FY14 by 3%. Consequently due to improved margins and profitability during 1HFY13 caused by hiveoff of lower margin nutrition business we revise upward our EPS estimate for FY13 and FY14 by 28% and 8% respectively. Perhaps now post the hive-off of nutrition business, the buoyant EBIDTA margin appears sustainable. We maintain our strong BUY rating on WPL with a target upgrade to Rs.2,268 on a one year time horizon valuing it at a P/E multiple of 18x to its FY14 earnings.

EBIDTA margin continues to expand, stood at 38.4% for Q2FY13 and 38.7% (Excluding Nutrition Business)

WPL EBIDTA margins for Q2FY13 expanded 302bps Q-o-Q due to divestment of Nutrition business (low EBIDTA margin business) and stock adjustments. For fair comparison if we exclude the nutrition business from Q1FY13 and Q2FY13 (25 days) numbers, WPL EBIDTA margins has improved by 340 bps to 38.7%. Such sharp improvement in margins was perhaps compounded by the favorable stock adjustments during the quarter. Nevertheless we see the margins threading upward amid at lower range. We believe WPL will maintain the EBIDTA margin in 32-35% in the longer run. We have increased our EBIDTA margin expectation for FY13 to 34.8% from our earlier forecast of 32% as we believe Generic Comtan will support the EBIDTA margins for the coming 2Quaters. WPL is the sole FTF generic player in the Generic Comtan market with 180days exclusivity in US market.

Change in R&D policy at the right time removes overhang

WPL has changed the most talked R&D policy at the right time and have expensed Rs.4.34 bn of intangible assets and product development cost capitalized till June 30,2012 against the nutrition business gain which in turn has thrown out a strong balance sheet position with reduced investors concern. WPL will now expense its R&D expense in the same quarter as an when incurred, the management expects R&D expense to increase 50bps year on year from the current level of 5.7%. EBIDTA margins post R&D and Nutrition have expanded 570bps Q-o-Q.

Valuation

We maintain our strong BUY rating on WPL with a target upgrade to Rs.2268 valuing it at a P/E multiple of 17.5x to its FY13EPS and 18x its FY14EPS. We believe investor concern of WPL loosing its market share in its key product Toprol-XL in US has not played out and we expect going forward their will be price cuts in Toprol-XL but may not be as aggressive as we saw in other product and WPL will lose market share as an when a new player enters the market, we peg a market share of 15% in Toprol-XL for WPL in FY14. We expect the stock would now trade inline with large cap Pharma majors and may also command premium over the same if the current financial performance continues to dominate going ahead.

Triggers for the stock going ahead

Maintaining market share in its key products (Toprol-XL) in US and reducing the dependence on the same by gaining new approval and ramping up the market share in its other products like Flonase, Comtan & Staleveo.

Source : Equity Bulls

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